RESTRUCTURING ZALE CORPORATION
TURNAROUND MANAGEMENT ASSOCIATION
July 1, 2011
Sudhanshu Jain
UNIVERSITY OF TEXAS AT DALLAS
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TABLE OF CONTENTS
Executive Summary……………………………………………………………………………………….……………… 5

Overview…………………………………………………………………………………………….……………. 5

Recommendations…………………………………………………………….………….………….…………….6
Jewelry Industry Outlook …..………………………………..…………………………..…….…………………………7

Competitive landscape…………………….…………………………………………………….………………..8

Seasonality and Cyclicality……………………………………………………………………….………………8

Products, Operation and Technology………………………………………………………….………………..9

Sales and Marketing……………………………………………………………………………..………...………9

Finance and Regulation………………………………………………………………………………………….10

Regional and International Issues………………………………………………………………..….………….10

Human Resource…………………………………………………………………………………………………10

Jewelry Industry Trends……………………………………………………………………………..…………..11

Critical Success Factors for Jewelry Industry………………………………………...………………………..12

Challenges Faced by Jewelry Industry………………………………………………………………………...14
Business Description………………………………………...……………………………………………………………15
SWOT Analysis……………………………………………………………………………………………………………16

Strength……………………………………………………………………………………………………………16

Weakness………………………………………………………………………………………………………….16

Opportunity………………………………………………………………………………………………………17

Threat……………………………………………………………………………………………………...………18
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Company Overview……………………………………………………………………………………………..………..18

Timeline/History of the Company…………………………………………………………………….………18

Recent Turnaround and M&A………………………………………………………………………….………20

Overview of Zale’s Online Stores……………………………………………………………………..………..21
Management and Corporate Governance…………………………………………………………………………...…23

Key Executives……………………………………………………………………………………………………23
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Key Points about Management...………………………………………...……..………………………………23
Financial Analysis………………………………………………………………………………………….……………..25

Historic Stock Performance……………………………………………………………………………………..25

Altman Z-Score Analysis…………………………………………………………………………….….……...27
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Profitability Analysis…………………………………………………………………………………………….27
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Liquidity Analysis…………………………………………………………………………………………..……29

Cash Burn Analysis…………………………………………………………………………………………..…..30
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Leverage Analysis…………………………………………………………………………………..……………30
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Activity Ratio Analysis……………………………………………………………………………………..……30

Same-store Sales Analysis………………………………………………………………………………...……..32
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Fixed Asset Analysis……………………………………………………………………………………….…….33
Peer Comparison………………………………………………………………………………………………….………33
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Stock Price Comparison………………………………………………………………………………………....34

Market Positioning Map…………………………………………………………………………………………35
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BCG Matrix Analysis…………………………………………………………………………………………….35
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Financial Ratio Comparison………………………………………………………...…………………………..36
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Store Level Observation and Comparison…………………………………………………………………….39
Range of Restructuring Alternatives………………………………………………………………………....…………41

Liquidation Value Analysis……………….…………………………………………………………………….41

Going Concern/Status Quo………………………………………………………………………..……………43
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Restructuring Balance sheet/Debt to Equity Swap…………………………………..……………………….45
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Strategic Buyout or Merger……………………………………………………………………………….……..46
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Debt Refinancing and Amendments……………………………………………...……………………………48
Recommendation………………………………………….....…………………………………………………..………..49
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Closing Underperforming Stores………………………………………………...……………………………..49
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Cost Reduction Plan……………………………………………………………………………..……………….49
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Marketing Led Strategy and Special Programs……………………………………………...………………..49
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Employee Training……………………………………………………………………………………………….50
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Focus on few brands, divest others and Designer Jewelry…………………………………………………..50
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Hiring Management/Key People with Jewelry Industry Experience…………………………………..….50
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Debt Refinancing…………………………………………………………………………………………………51
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Debt reduction by Debt-equity Swap………………………………………………………………………......51
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Valuation for the Recommended Plan of Action………………………………………..…………………….51
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Sensitivity Analysis using Monte Carlo Simulation.....………………………………………………………52
Exhibits...………………………………………………………………………………………………………………..…54
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Executive Summary
Overview
Cash-strapped Zale Corporation, one of the largest jewelry retail in the U.S., has been struggling for the past
three years. Zale has about 1,890 stores that produce annual revenue of $1,600 million. The economic
downturn and poor holiday sales left the once-largest U.S. jewelry retailer without the cash it needed to pay
suppliers. It canceled orders and took the unusual step of asking vendors to purchase inventory for cash. In
mid-January 2010, top three executives left the Company after holiday sales fell 12 percent. The present key
executives have good retail industry experience, but lack jewelry industry experience. Zale’s stock price took a
hit in 2008-2009 when it dropped from $28 per share to $1.20 per share. The stock now trades at $3.25. With
32.1 million shares outstanding, Zale lost approximately $1 billion of market capitalization in less than six
months.
Zale Corporation, whose stores are typically located within shopping malls, encountered challenging
conditions in 2007 when it tried to go more upscale, but had to heavily discount its merchandise due to
competition, which hurt its profits. Zale sold its high-end Bailey Bank and Biddle chain to Finlay Jewelers. It
also closed hundreds of stores in 2008 and 2009. One of the biggest drains on Zale’s cash is the large number of
lease payments the company makes on space leased in poor performing malls throughout the country. Zale
Corporation still needs to close several hundred underperforming stores to return to profitability.
Financial analysis of Zale Corporation shows that one of the factors which put the company in disadvantage is
high SG&A expense compared to the industry average. Zale is highly leveraged compared to its competitors.
The company’s high debt-to-equity ratio has been responsible for a huge cash outflow in the form of interest
payments. Zale had $26 million cash and $125 million available under a $600 million line of credit. If the
amount available on that credit line falls below $50 million, Zale will be in default on its covenants.
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Store-level observation of Zale and its competitors revealed that sales people in the store lack proper training
and experience, which is one of the critical success factors in the jewelry industry. Zale also lacks a good bridal
program and special holiday season programs compared to its competitors, such as Helzberg Diamonds.
Recommendations
Zale Corporation should consider a comprehensive restructuring plan to address its various issues:

To deal with the issue of stores in loss, Zale should consider closing down its underperforming stores.
The company should consider implementing four-wall EBITDA analysis to select the unprofitable
stores to be closed.

To address its high SG&A expenses, Zale should consider changing its corporate structure.

To drive sales up, Zale should introduce special bridal programs, new product lines, and designer
jewelry, and should increase its direct marketing efforts to create brand awareness.

To address the issue of its unskilled sales people, Zale should stress more on employee training.

Zale should focus more on a few brands and divest others. It should consider selling its unprofitable or
less profitable brands, which will help to increase brand value.

Hire at least a few key executives with extensive experience in the jewelry industry to address the issue
of management’s lack of industry experience.

Zale is highly leveraged and most of the debt is due in 2013 and 2014. The company should consider
debt refinancing and a debt-to-equity swap. Debt refinancing will cause minimal business disruption
and management can remained focused on implementing turnaround plans. Reduced debt level after
completion of exchange would reduce interest burden on the company and would free up additional
liquidity.
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Jewelry Industry Overview
The U.S. retail jewelry industry is composed of five main segments: bridal jewelry (30%), fashion jewelry
(22%), watches (18%), precious stones (15%) and precious metals (15%). Bridal jewelry is considered a
necessary component of jewelry retail and is less influenced by economic conditions than fashion jewelry,
which is considered a luxury good. Precious metals include gold, silver, platinum and palladium. Precious
stones come in over 130 varieties, around 50 of which are commonly sold by retail jewelers.
Precious
Metals
15%
Precious
Stones
15%
Watches
18%
Bridal
Jewelry
30%
Fashion
Jewelry
22%
Chart: US Retail Jewelry Industry’s Five Segments
The U.S. jewelry retail industry is highly fragmented, with the top 50 jewelry chains generating less than onehalf the revenue and the top 10 jewelry chains comprising less than 25% of the market. No retailer claims more
than a 6% market share.
The U.S. jewelry retail industry includes about 28,000 specialty stores with combined annual revenue of about
$30 billion. The industry employs approximately 200,000 individuals. Wal-Mart is the largest retailer in the
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U.S. Major companies include Zale, Tiffany, and Sterling Jewelers. U.S. retailers account for 15% of worldwide
sales in the industry.
Competitive Landscape
The demand for jewelry is largely determined by the consumers’ disposable income. Sales depend on the
number of affluent individuals, working women, double-income households, and fashion-conscious men.
When the raw material prices fall, jewelry becomes more affordable and consumer demand rises. Small
jewelers can compete effectively with large chains because price is not the main factor that determines sales.
Profitability depends on merchandising and effective marketing.
Jewelry is not only sold by specialized jewelry retailers, but also by department stores and mass merchants.
Because regular gross margins are very high, often 50 percent, mass merchants have been able to cut prices
and take market share.
Over the past decade, online jewelry sales have risen steadily. This development has forced retail merchants to
adapt and many moved some components of their operations online. Increasing numbers of manufacturers
and wholesalers are also conducting business online. Because jewelry is seldomly branded, product
differentiation is a key point of competition among retailers. Good designers are valued.
Seasonality and Cyclicality
Jewelry sales are both seasonal and cyclical in nature, with 40 percent of revenue and the majority of profits
generated in the fourth quarter and 25 percent of annual jewelry sales occurring in December. Jewelry sales are
high during the Christmas season and during the weeks proceeding Valentine’s Day. Mother’s Day
experiences a spike in sales as well. Overall sales can be affected by mineral availability, fashion trends,
environmental regulations, and international tariffs. Gold, silver, platinum and palladium are all exchangeable
commodities, and fluctuations in market price directly affect sales volume.
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Products, Operations & Technology
Jewelry is often classified as bridal merchandise (engagement, bridal, and anniversary rings - about 35 percent
of the market); fashion jewelry (rings, bracelets, earrings, pins, gold chains); and watches, silver flatware, and
other giftware. Diamond jewelry and loose diamonds account for the largest share of total jewelry store sales
(46 percent); gold jewelry for 11 percent; colored gemstone jewelry (rubies, sapphires, emeralds, etc.) 9 percent;
and watches 4 percent.
Jewelry is expensive, intimidating, and difficult for consumers to evaluate. Purchases, therefore, require a
good deal of service and professional expertise. Consumers are most likely to buy jewelry from a merchant
they feel is trustworthy. Large retailers, such as Wal-Mart and Tiffany, benefit from this industry peculiarity;
local jewelers with community roots and good reputations benefit as well.
Jewelers’ operations consist of buying jewelry from manufacturers and wholesalers, training sales staff,
and marketing products through various channels. Many jewelers also operate repair services, which can
account for 10 percent of annual revenue. Company buyers must be both technically skilled and aware of
fashion trends. Most retailers buy merchandise that is fully finished from many different manufacturers. Some
retailers create pieces themselves. Retailers also sell merchandise on consignment from manufacturers.
Sales & Marketing
Because jewelry retailers must present an upscale appearance, store location, furnishings and professional staff
are significant operating expenses. Companies may cater to various demographics, but an elegant and
professional appearance is considered vital. Most retailers market through print advertising, although mail
and email campaigns are also utilized. These campaigns are narrowly focused, and use demographic
information gleaned from market research.
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Finance & Regulation
Merchandise inventories are high, often more than 50 percent of annual sales, and inventory controls must be
tight to prevent embezzlement. Accounts receivable are very high for companies that offer their own credit
card. Because jewelry is expensive, credit is a key issue for retail jewelers. The average cash purchase is usually
much lower than the average credit sale. About 50 percent of a typical jeweler’s sales are financed on credit
cards. The introduction of in-house credit cards, which are offered by large retailers in conjunction with banks,
has served to boost sales by providing customers with lower interest rates and better terms. Most small
retailers avoid risk by taking only third-party credit cards.
Such as other retailers, jewelers must adhere to standard fair trade and credit laws. The Federal Trade
Commission requires that jewelers accurately advertise and describe gemstones, especially if they have been
treated to change color.
Regional & International Issues
Most jewelry sold in U.S. stores is imported. Imports have increased rapidly in recent years. The largest
sources of jewelry imports in 2009, excluding costume jewelry, were India, China, Thailand, and Canada. Israel
and Belgium are major centers for converting rough diamonds into finished gemstones. The three largest
markets for U.S. exports of precious metal jewelry are Switzerland, Japan and Thailand.
Human Resources
Employees of higher-priced jewelry stores usually require special training and may be bonded for security
reasons. Due to the special expertise required, most workers at high-end stores work full time. Sales people
often work on commission. Average hourly industry wages are moderately lower than the national average.
Retail jewelry stores have an exceptionally good safety record.
(Source: First Research, S&P Net Advantage, and Business and Company Resource Center)
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Jewelry Industry Trends

Creating Brand Names: To increase consumer confidence, retailers and manufacturers are trying to
establish brand names. Although branding has been successful for signature pieces from famous
retailers such as Tiffany, gemstone branding has had little impact so far. Branding has been most
successful for watches.

Prices of Gold Rising: The price of gold has risen dramatically, which has made gold fall out of
favor with many customers and retailers. Some stores have started carrying more pieces that contain a
mix of gold and less expensive silver or are made from lightweight “lacey” gold.

Platinum Jewelry Enjoys Brisk Sales: Despite significantly higher prices for the metal, platinum
jewelry is still enjoying higher sales volume, due primarily to the new technology that is allowing
designers to create lighter weight pieces at lower prices and also due to new promotional strategies that
are enticing new customer groups, such as younger adults, into the market.

Business Sales and other Products: In addition to selling jewelry to individuals, some companies,
such as Tiffany, sell items like cups, pens, watches, and pins to business accounts for use in employee
programs. Nearly 15 percent of Tiffany’s sales come from non-jewelry items.

Shrinking Number of Stores: The number of retail jewelry shops is on the decline. The number of
stores fell by more than 1,000 between 2002 and 2007, which was a 3.5 percent drop. The industry is
losing stores as a result of consolidation and companies cutting back on expansion plans to focus on
existing stores in light of slipping sales.

Growing Internet Sales: Although most jewelers believe it is easiest to sell merchandise in person,
the growing online market has attracted many vendors. Online sales now account for about 17% of
total jewelry industry sales. Some consumers are wary of spending thousands of dollars on a diamond
ring through a website; however, many are not. Therefore, it is necessary for a retailer to showcase
jewelry, to educate consumers, and to inspire them to visit the brick-and-mortar stores.
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
Changing Demographics: About 39% of the U.S. adult population purchases fine jewelry each year,
and consumers from age 18 to 24 have the highest incidence of fashion jewelry purchases. The
population demand between age group 45 to 65 for high-end jewelry is the highest, and the
demographic picture for retail jewelry markets is strong.

Private Credit Cards: Retailers with private credit cards have had some success in marketing
services such as credit insurance to customers. Almost one-half of all cardholders purchase some form
of insurance from their jeweler and cards also have been used to market promotional materials.
Jewelers view cards as a means of engineering themselves to customers, and may use them to bundle
promotional materials related to the store.
Critical Success Factors for Jewelry Stores
For jewelry retailers to be successful, they should know what their customers want from a purchase and
should take steps to gather important information about shoppers’ taste and preferences. Various critical
factors to achieve success in jewelry stores industry are as follows:

Training of Sales People: The companies should train their sales team to “feel out” customers to
determine if they want to be helped or if they are just looking. If customers want to be helped, sales
people should be able to tailor their presentations to each customer’s concerns rather than taking the
same approach with each customer. It is very important to understand and cater to the true needs of a
customer in the jewelry store industry.

Taking Customers’ Feedback: It is a very crucial in the jewelry store industry to ask customers what
they think of a product they just purchased or about their overall shopping experience in the store. The
customer should be given incentives to encourage them to answer. In-store surveys, email
questionnaires, and other types of feedback help determine the right mix of products in a variety of
price points and bring retailers “closer to their customer.”
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
Taking Decisions Based on Marketing Research Tools: Jewelry stores should make decisions based
on trend reports, sales performance figures, competitive analysis, market demand forecasts and focus
groups.

Advertising and Marketing: One of the very important factors to build awareness, to generate traffic,
and to promote the store’s “brand value” is advertising and effective marketing. Due to the emotional
factor attached with jewelry, it is also important to reach out to the community by sponsoring charity
events or sports teams, or by hosting concerts and art shows. These are some of the good ways to
attract new prospects for a reasonable investment.
Some of the characteristics mentioned in the advertising that motivates potential customers to call, or to
make them feel comfortable in doing business with the store are mentioned in the table below:
Guarantees/warranties
Repairs Done on Premises
Member, American Gem Society, BBB, Jewelers of America
Watchmaker/Appraiser/Goldsmith on Premises
“Highest Price Paid”
Expert Ring Sizing
Skilled Designers/Award-Winning Designs
Confidentiality/Privacy/Discretion
Registered Jeweler/Master Diamond Cutter
Certified Appraisal/Onsite Manufacturer
Family-Owned and Operated
Master Jeweler
Location Data/Maps
Mail/ Phone orders
Rings Sized While-U-Wait
Repairs While-U-Wait
“Qualified Free Estimates”
Open 6/7 Days/Evenings
Credit Cards/Financing/Layaway
Invitation/Inducements to Visit Website
Instant Cash/ Free Appraisals
“View Inventory Online”
Number of Engagement Rings
Low Prices(Loan Forfeits)
Table: Some of the confidence characteristics mentioned in Jewelry Store Advertisements
(Source: IndustryIQ.biz)

Understanding Emotional Factors That Drive Sales: Customers’ jewelry shopping experience has
mostly an emotional factor attached. The retailer should be able to understand that emotional
excitement properly. This type of emotional excitement often leads to the purchase of “add-ons” such
as jewelry cleaner, jewelry boxes or travel pouches.
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
Running Special Programs:
Special programs, such as bridal programs and valentine special
programs, help jewelry retailers drive their sales up.

Other Factors: Other critical factors, including inventory control, cost management, pricing policy, and
location strategy, plays an important role in the jewelry industry.
Challenges Faced by the Jewelry Industry

Dependence on Key Suppliers: With the world diamond supply primarily controlled by De Beers,
retailers find themselves at the mercy of the giant cartel’s pricing and distribution decisions. Synthetic
diamonds have begun to replace the De Beers monopoly.

Exposure of Credit Risk: The practice of extending credit to well-known customers expands in
periods of economic strength because collection proves easier. Extending credit affords smaller retailers
with another competitive tool, although the possibility of customer default always exists.

Crime Exposure: Because merchandise is valuable, retailers are prominent targets for potential
thieves. Employees must be screened and security is important. The industry loses over $100 million
yearly to crime.

Competition from Mass Merchants: With sales by mass merchants nearing 50 percent of total retail
sales, independent jewelers and department stores are scrambling to compete. In particular, Wal-Mart
has presented stiff challenges to smaller U.S. retailers.

Sales Linked to Economic Health:
Disposable income and consumer confidence are key
determinants in the success of retail jewelers. High-end sales in particular suffer in times of economic
drought.
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Business Description
Zale Corporation operates as a specialty retailer of fine jewelry. The company operates through three
segments: Fine Jewelry, Kiosk Jewelry, and All Other segment (insurance and reinsurance).
Fine Jewelry Segment
The Fine Jewelry segment operates under five brands. The Zales Jewelers brand provides diamond jewelry
primarily in the bridal and fashion segments through 693 stores in 50 states and Puerto Rico. The Gordon
Jewelers brand provides jewelry in 202 stores in 31 states of the United States and Puerto Rico. The Peoples
Jewelers and Mappins Jewelers brands offer gold jewelry, gemstone jewelry, and watches through 212 stores
in Canada. The Zale’s Outlet brand offers branded watches, gemstones, gold merchandise, and diamond
fashion and solitaire products through 140 stores in 36 states and Puerto Rico. The Fine Jewelry segment also
sells its products through e-commerce sites, such as zales.com and gordonsjewelers.com. This segment targets
the middle-class consumer, and products can be found online as well as in stores. Zales Jewelers is the
company’s brand name and consumers can buy jewelry at moderate prices through this brand. Most of the
jewelry sold at these stores is designed by the company and is offered at different price points.
Kiosk Jewelry Segment
The Kiosk Jewelry segment provides gold and silver products, such as bracelets, earrings, charms, rings,
14-karat and 10-karat gold chains, and silver and diamond jewelry primarily under Piercing Pagoda, Plumb
Gold, and Silver and Gold Connection brand names, through 684 mall-based kiosks. These kiosks can be
mostly found in malls and mainly target teens and other fashion-oriented customers who prefer low-level
prices. These kiosks are strategically placed in high-traffic areas where they are visible and accessible for
customers who are strolling in the mall.
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All Other Segment (Insurance and Reinsurance)
The All Other segment provides insurance and reinsurance facilities for various types of insurance coverage,
such as merchandise replacement coverage, credit insurance coverage, and discontinued lines of insurance.
Credit insurance coverage gives protection to the cardholder and creditor for losses due to a disability,
unemployment, or even death of the cardholder. Zale has a connection with Citibank USA, which provides
customers with insurance and payments for insurance products.
Zale Corporation was founded in 1989 and is headquartered in Irving, Texas.
(Source: Capital IQ and Mergent Online)
SWOT Analysis
Strength
1. The company has comprehensive wedding, bridal, engagement and anniversary collections, which
gives it a competitive edge over its competitors.
2. Another competitive advantage comes from a large variety of men’s, women’s and children’s jewelry.
3. Financing options through Zale’s credit card.
4. Large retail network of Zale Corporation in North America.
5. The company’s trademarks and trade names help to sustaining its competitive position in the jewelry
industry.
6. Diverse brand portfolio is also one of the strength of the company.
Weakness
1. Poor financial performance in 2008, 2009, and 2010 shows the company has suffered from the financial
crisis more than any of its competitors.
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2. The company has a very high debt-to-equity ratio compared to industry average, which means Zale
uses a lot of leverage and does not have a very strong equity position.
3. Zale’s ability to generate internal funds and its borrowing capacity has weakened the last couple of
years.
4. Zale has a very concentrated customer base. The locations of the company’s stores are limited to North
America. This is a disadvantage because most of Zale’s competitors are more geographically
diversified. Although the company has expanded its business online, it has mostly expanded its
business in North America. Competitors, such as Blue Nile and Tiffany, now operate in countries in
Europe and Asia through a web portal, which makes it easier to reach a broader specter of customers.
By focusing mainly on regions in North America, the company increases its risk and limits growth at
the same time.
Opportunity
1. Strongly performing e-commerce business. Through its website, customers can get information about
various stones, maintenance advice, and help on product purchases. The website also allows
consumers to design their own jewelry, such as rings and wedding bands. Internet sales accounted for
3 percent of Zale’s revenue in 2009.
2. Cost-reduction initiatives would help to reduce SG&A expenses and thus help the company to become
profitable again.
3. Changing demographics. The number of Americans aged 45 to 64, the segment of the population that
typically has the highest income, is forecast to increase by about 4 percent between 2010 and 2020
compared to a 10 percent increase in the population overall. Many jewelry stores rely on higher-income
customers for much of their business.
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Threat
1. If the general economy performs poorly, discretionary spending on goods that are, or are perceived to
be, “luxuries” may not grow and may decrease.
2. Increased competition can affect the sales of the company in future.
future
3. Increased minimum wages also put a threat in front of the company.
company
4. The concentration of a substantial portion of sales in three relatively brief selling periods (Christmas
Holidays, Valentine Day and Mother’s Day) means that performance is more susceptible to
disruptions.
5. Sudden decrease in cash flow and earnings makes the company more “vulnerable” in the sense that the
company is not generating enough money itself and will rely more on borrowing.
6. The Diamond Trading Company, which is the number one supplier of diamonds, can affect
affe prices and
supply of diamonds.
7. Zale is more vulnerable to economic downturns than its high-end
end competitors.
competitors Traditionally,
discretionary purchases, such as fine jewelry, are the first to suffer when the economy takes a
downturn and consumer spending slows. Since a majority of the store brands under the Zale’s Fine
Jewelry segment targets the middle-income
middle income consumer base, the company is also more vulnerable to
economic downturns than the higher-end
higher
jewelry sellers.
Company Overview
Time L
Line / History of the Company
1920s-1950: First Zale Jewelers store was opened in Texas in 1924. Between 1925 and 1950, Zale launched a
revolutionary marketing strategy with a credit plan of “a
a penny down and a dollar a week,
week,” making jewelry
and other merchandise affordable to the average working American. Zale opened roughly one new store each
year in Oklahoma and Texas. A cooperative buying system was established to centralize the purchase and
a
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distribution of merchandise for all stores, which enabled the company to buy in larger quantities at lower
prices.
Zale acquired Corrigan’s of Houston, its first fine jewelry store in 1944, which eventually led to the launch of
the Bailey Banks & Biddle brand. In 1957, Zale Jewelers broadened its reach by opening the first store in a
shopping center, which was a major shift from operating only in downtown locations. The same year, Zale also
announced the initial public offering of its stock (ZLC) and begins trading its public shares on the American
Stock Exchange the following year.
1960s-1990:
Following the discovery of synthetic diamond technology, the company diversified and
branched out into shoes, sporting goods, drug stores, furniture, and catalog stores. To reflect this diversity, the
company name became Zale Corporation. The company acquired the 890-carat “Incomparable Diamond,” the
largest internally flawless diamond in the world. In 1989, the leveraged buyout of Zale by Peoples Jewelers of
Canada and Swarovski International of Austria took place. In 1989, the company acquired all the outstanding
common stock of Gordon Jewelry Corporation.
In 1992, the company reduced its long-term debt, rejected unfavorable long-term leases, and consolidated
substantially all its retail operations into its wholly owned subsidiary, Zale Delaware. The plan of
reorganization resulted in the elimination, through merger or liquidation, of 17 of the company’s former
subsidiaries. In 1993, the company emerged from Chapter 11 bankruptcy law proceedings after a federal court
approved a revised distribution formula for its reorganization plan. In 1996, the company acquired Karten’s
Jewelers. In 1997, the company consummated the sale of the majority of the assets of its Diamond Park Fine
Jewelers Division. In 1999, the company purchased substantially all the assets of Peoples Jewelers Corporation.
2000-2010: In 2000, Zale sold its private-label credit card operations and its outstanding accounts receivable,
without recourse, to Associates Credit Card Services, Inc. In 2000, Zale acquired all the shares of Piercing
Pagoda. In 2007, the company sold its wholly owned business unit, Bailey Banks & Biddle, to Finlay Fine
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Jewelry Corporation. In 2008, Zale created a new management team under the leadership of CEO Neal
Goldberg that included veteran Zale executives and new talent with significant retail experience. In 2009, an
SEC investigation was launched against a few accounting mistakes in the company’s financial statements. In
2010, Zale secured a $150-million, five-year senior secured loan that was provided by the private equity firm,
Golden Gate Capital.
Recent Turnarounds and M&A
Zale Corporation and Golden Gate Capital
In June 2010, Zale secured a $150-million, five-year senior secured loan that was provided by the private
equity firm, Golden Gate Capital.
Zale will pay a steep price for the loan. Zale will see a much higher interest expense on the Golden Gate loan
starting in 2011. The loan carries an enormous 15 percent annual interest rate. The deal cost Zale $25 million in
origination fees. More expensive to stakeholders in the long run, the desperate deal allowed Golden Gate
Capital to have warrants to buy 25% of the company.
Interest expense has gone up dramatically and is expected to go up even more in the future. Upon any loan
covenant violation, Golden Gate Capital can force a bankruptcy filing. In a bankruptcy, Golden Gate Capital
could restructure leases, “hair-cut” vendors, and take Zale private. Because Zale is likely to violate multiple
covenants with the Golden Gate Capital term loan, Golden Gate Capital is obviously comfortable with taking
and holding Zale private. The biggest losers in bankruptcy will be the Zale vendors because Golden Gate
Capital is secured and senior to the vendors’ claims. The shareholders will also become wiped out in any
bankruptcy.
20
Overview of Zale’s Online Store
Features: Zale’s website is markedly less aesthetically adventurous than the more glamorous, boutique-style
jewelry outlets such as Blue Nile or Swarovski. This is not a negative because Zale targets a demographic
concerned with quality at an affordable price. The website’s fully indexed and intuitive search features make
finding the item customer has in his mind’s eye before visiting the site surprisingly easy.
The Zale site is divided into subcategories by jewelry type and features two sections: the “wedding” and
“clearance” sub sites. The “clearance” site conglomerates all items currently on sale at Zale, which is an
inestimable time saver for the bargain hunter. The “wedding” section of zales.com offers useful information on
jewelry, engagement, wedding traditions, and even offers up anecdotal love stories to get into the spirit of
things.
One of the good features on the Zale site is its informational material, such as frequently asked questions and
articles that function as crash courses in everything from specific gem types to pearl care and maintenance. If a
customer is feeling trepidation about investing in a diamond, Zale provides information that will help the
customer make a decision with confidence. The articles on diamonds detail the meaning of carat, types of cuts,
clarity and color.
Although shopping online is more convenient than driving around town to inspect individual items, a
customer cannot get the same feel for an item through the screen as he can in person. Zale takes detailed
photos of every item to ensure that the customer has an accurate idea of what to expect on his doorstep after
completing an order.
Inventory: Zale’s primary strength is the sheer size of its collection. Thousands of rings, charms, bracelets,
earrings, necklaces and brooches fitted with precious gems of every description can be found at Zale. Zale
21
specializes in gold and sterling silver above all else, but a customer can also find jewelry wrought from
tungsten, titanium, platinum and brass.
Although an in-store visit offers a more tactile experience, the online exclusive items that Zale has give the site
an increased relevance. The online featured pieces range from $90 last-minute gifts to $100,000 unique
creations.
Shoppers interested in acquiring loose stones can find a small variety of small carat diamonds at zales.com.
Up against Tiffany and Co., big designer names are not as well represented in Zale inventory, but there is no
shortage of stylish jewelry. Designer names and big brands are, however, quite visible in its inventory of
wristwatches: Bulova, Citizen, Ed Hardy, Hello Kitty and Wittnauer are staples of its wristwatch collection.
Price Range: Zale is unrivalled when it comes to the sheer variety of jewelry it has available. Zale also has
competitive prices. From diamond stud earrings to gemstone pendants, Zale has options available for every
budget. Zale has hundreds of items for under $200 that makes it an irresistible option for the frugal jewelry
shopper.
Security: Zale uses secure servers for credit card transactions. A customer can also pay via a pre-existing
PayPal account.
Customer Support: Zale has telephone and email support staff available all day. In the event a customer
changes his mind about an item, Zale allows customers 30 days to return purchases for a full refund. Zale
22
offers free FedEx shipping on items purchases over $149. For gifts, Zale can arrange a gift box with a
customized message.
(Source: Reviews available at http://online-jewelry-review.toptenreviews.com)
Management and Corporate Governance
Key Executives
The key executives of Zale Corporation include:

Theo Killion, Chief Executive Officer

Matthew W. Appel, Chief Administrative Officer and Chief Financial Officer

Gilbert P. Hollander, Executive Vice President, Chief Merchant & Sourcing Officer

Richard A. Lennox, Executive Vice President, Chief Marketing Officer
(For Detailed Bios and Responsibilities of Key Executives, refer Exhibit VIII)
Key Observations

Zale has had three chief executive officers in the past seven years. Termination of executives causes a
huge cash outflow as compensation and other benefits. The average tenure of Zale’s chief executive
officer is shorter than the industry average.

Most of the management personnel have experience in retail industry and not in jewelry retail
industry. The jewelry industry is a specialty retail industry that functions in very different way
compared with the general retail industry. Average experience in jewelry industry is about three years
per executive.

In mid-January 2010, top three executives including ex-CEO Neal Goldberg left the firm, after holiday
sales fell 12 percent.
23

The company’s executive ranks have been in flux for several years. Interim CEO Theo Killion is the
company’s seventh CEO in 15 years.

A Zale CEO‘s compensation is very high compared to its competitors and the industry average, as
shown in the chart below:
Chart: Comparison of Number of employees, CEO Compensation and CEO tenure with industry average

There has been a dramatic decline in ZLC’s stock price after most of the current key executives took
over their position as shown in the chart below:
Chart: ZLC stock performance with significant management change
(Source: Mergent Online)
24
Other Employees:
Zale has been cutting its number of employees continuously since 2007. In 2007, the company had around
17,500 employees. In 2010, this employee number decreased to around 12,800. The layoff was good with
respect to the economic scenario, the company had been facing. However, compared to the industry average,
Zale’s total number of employees is much higher.
Zale Corporation (NYSE:ZLC) - Total Employees (FY)
19.00k
18.00k
17.00k
16.00k
15.00k
14.00k
13.00k
12.00k
FY2005
FY2006
FY2007
FY2008
FY2009
FY2010
Chart: Change in the number of employees from 2005 to 2010
Financial Analysis
Historic Stock Performance
Zale’s stock price peaked at $34.20 on July 20, 2005, and then dropped. The stock now trades at $3.25. With 32.1
million shares outstanding, Zale lost approximately $1 billion of market capitalization in less than six months.
The biggest drop happened from September 2008 to February 2009, when Zale’s stock dropped from $28 per
share to $1.20 per share. The stock price increased to $5.70 in January 2011, but then again dropped to current
market price of $3.25
The following charts show the evolution of Zale’s stock price in the last three years, and since 1993.
25
35.00
Zale Corporation (NYSE:ZLC) - Share Pricing
25.00
15.00
5.00
-5.00
Chart: Three year ZLC Stock Performance
Zale Corporation (NYSE:ZLC) - Share Pricing
35.00
25.00
15.00
5.00
-5.00
Chart: ZLC Stock Performance since 1993
The table below presents the analyst’s opinion on Zale’s stock in past five years.
Date
9-Apr-10
7-Dec-09
25-Nov-08
11-Jan-07
13-Jun-06
12-Jun-06
8-Jun-06
9-Nov-05
3-Nov-05
18-Feb-05
Research Firm
Soleil
Soleil
CL King
WR Hambrecht
KeyBanc Capital Mkts / McDonald
KeyBanc Capital Mkts / McDonald
Goldman Sachs
Goldman Sachs
JP Morgan
KeyBanc Capital Mkts / McDonald
Action
Downgrade
Downgrade
Downgrade
Initiated
Downgrade
Upgrade
Upgrade
Downgrade
Downgrade
Upgrade
From
Hold
Hold
Accumulate
Buy
Hold
Underperform
In-Line
Neutral
Underweight
To
Sell
Sell
Neutral
Sell
Hold
Buy
In-Line
Underperform
Underweight
Hold
Table: Analyst Opinion in the Past 5 years
(Source: Yahoo Finance)
26
Altman Z-Score Analysis
The Altman Z-Score model combines five different financial ratios to determine the likelihood of
bankruptcy amongst companies. The company’s Altman Z-Score is between 1.8 and 2.99, which means
there are good chances of the company going bankrupt within two years of operations from the date of
financial figures given. The chart below shows the Altman Z-Score for the last five years. The decrease in the
Altman Z-Score was due primarily to the decrease in market value of equity, decrease in revenue, increase in
debt, and negative earnings before interest and taxes.
(Refer Exhibit XI for Altman - Score Analysis)
Altman Z Score
5
4.14
4
3.73
3.55
3
2.34
2.27
2009
2010
2
1
0
2006
2007
2008
Chart: Altman Z-Score (2006-2010)
Profitability & Margin Analysis
Zale’s total revenue decreased from $2,138 million in 2008 to $1,780 million in 2009, and then to $1,616 million
in 2010. The primary reason for this decrease in revenue was the economic recession that started in the year
2008. The operating income margins in the years 2009 and 2010 were negative due primarily to the increased
SG&A expenses. SG&A expenses increased from 46.4% in 2008 to 52.5% in 2009, and then remained the same
27
in the year 2010. The EBIT margins in 2008, 2009 and 2010 were 0.4%, -9.2% and -5.1%, respectively. The fiveyear average EBIT margin and three-year average EBIT margins were -1.0% and -4.6%, respectively.
(Refer Exhibit X for Profit Margin Analysis)
Zale Corporation (NYSE:ZLC) - Total Revenues, 1 Yr Growth % (FY)
10.00
5.00
0.00
-5.00
-10.00
-15.00
-20.00
FY2002
FY2003
FY2004
FY2005
FY2006
FY2007
FY2008
FY2009
FY2010
Zale Corporation (NYSE:ZLC) - Total Revenues,…
Chart: Growth in Total Revenue from 2002 to 2010
In 2010, return on equity and return on assets were -4.3% and -28.1%, respectively. Negative ROE and ROA
were due to the negative earnings in 2009 and 2010.
Zale Corp.
Profitability Analysis
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Return on Assets %
4.4%
3.6%
0.4%
(7.7%)
(4.3%)
Return on Capital %
Return on Equity %
6.4%
7.4%
5.2%
5.6%
0.6%
(0.9%)
(12.9%)
(35.4%)
(8.0%)
(28.1%)
Return on Common Equity %
7.4%
5.6%
(0.9%)
(35.4%)
(28.1%)
(Source: Capital IQ)
28
Liquidity Analysis
Zale’s current ratio decreased from 2.7X in 2008 to 2.3X in 2009, and further decreased to 2.0X in 2010. The fivefive
year average current ratio was 2.6X. Zale’s
Zale’ quick ratio was 0.1X. The quick ratio was
wa more conservative than
the current ratio because it excluded inventory from current assets. Inventory iis excluded because some
companies have difficulty turning their inventory into cash,
cash, which means current assets are composed mainly
of inventories. A very low quick ratio compared to current rat
ratio
io indicates the company’s current assets are
composed mainly of inventories.
(Refer Exhibit X for Liquidity Analysis)
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Avg. Days Inventory Out.
304.9
338.8
305.7
296.2
328.4
Avg. Days Payable Out.
59.2
64.2
70.9
57.1
67.2
(Source: Capital IQ)
Inventories were slashed from $903.3 in 2006 to $703.1 million in 2010, which resulted in $200 less millions in
available stock. Zale took the very unusual step of asking diamond merchants and other vendors to buy back
old jewelry,
ry, including products they did not manufacture, in exchange for a pledge of future orders. The chart
below shows the inventory on balance sheet from 2006 to 2010, in millions of dollars:
Chart: Inventory on balance sheet from 2006 to 2010
29
Cash Burn Analysis
Zale’s EBITDA as of the LTM (April 1, 2011) was $16.1 million. In the LTM, the company had a capital
expenditure of $12 million and a change in working capital of $56.9 million. Therefore, the company’s free cash
flow was -$52.8 million in the LTM. This implies that the monthly cash burn rate was about $4.4 million. Zale
had cash of $36.9 million on the balance sheet as of the LTM. Assuming the company does not borrow money,
Zale’s cash will last for about nine months. This implies the company will run out of cash by December 2011.
(In Million $)
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Beginning Cash Balance
36.9
32.5
28.1
23.7
19.3
14.9
10.5
6.1
1.7
Less Net Cash Flow (Monthly)
-4.4
-4.4
-4.4
-4.4
-4.4
-4.4
-4.4
-4.4
-4.4
Ending Cash Balance
32.5
28.1
23.7
19.3
14.9
10.5
6.1
1.7
-2.7
Table: Projected Monthly Cash Burn
Leverage Analysis
Zale had total long-term liabilities of $464 million. Zale’s current liabilities as a percentage of total assets was
33.5%. The total long-term liabilities as a percent of total assets was 40.0%. The company was highly leveraged
compared to the industry average. In 2010, Zale’s interest coverage ratio was -5.2X due to the negative
earnings before interest and taxes. The lower the ratio, the more the company is burdened by debt expense.
Also, when the interest coverage ratio is less than 1, its ability to meet interest expense is questionable. A low
interest coverage ratio indicates the company is not generating enough revenue to satisfy interest expenses.
(Refer Exhibit X for Leverage Analysis)
Activity Ratio Analysis
Zale’s inventory turnover ratio and account payable turnover ratios decreased in 2010 compared to 2009. A
decrease in inventory turnover implies poor sales, thus excess inventory. High inventory levels are unhealthy
30
for the company because they represent an investment with a rate of return of zero. It also opens up the
company to trouble should prices begin to fall. A decrease in account payable turnover gives an indication that
the company is taking longer to pay off its suppliers than it was before.
(Refer Exhibit X for Activity Ratio Analysis)
Revenues by Segments
Zale suffered primarily in the Fine Jewelry segment from 2008 to 2010. The Fine Jewelry segment’s revenue
decreased from $1876.2 million in 2008 to $1378.5 million in 2010. The Kiosk Jewelry segment, which offers
bracelets, earrings, charms, rings, and 14-karat and 10-karat gold chains, did not suffer much from 2008 to 2010
during a recession. The table below shows segment-wise revenue earned by Zale. The Fine jewelry segment
generated about 85% of the revenue, while the remaining 15% represented sales from the Kiosk segment.
(In Million $)
2006
2007
2008
2009
2010
Fine Jewelry
1,864.2
1,876.6
1,876.2
1,535.6
1,378.5
All Other
13.1
13.6
12.4
11.3
11.6
Kiosk Jewelry
276.6
262.6
249.5
232.8
226.2
2,154.0
2,152.8
2,138.0
1,779.7
1,616.3
Total Revenues
(Source: Capital IQ)
31
Operating Income by Segments
Zale had negative operating income in 2009 and 2010. The table below shows segment operating income
earned by Zale.
(In Million $)
Fine Jewelry
2005
2006
2007
2008
2009
2010
147.4
117.0
104.4
18.9
(192.7)
(84.8)
6.8
6.4
6.8
5.6
5.7
4.7
Corporate
(5.5)
(52.8)
(32.9)
(27.3)
(24.5)
(48.5)
Kiosk Jewelry
29.0
20.4
6.6
9.9
2.5
13.1
177.8
91.1
84.9
7.2
(209.0)
(115.4)
All Other
Total Operating Income
(Source: Capital IQ)
Same-Store Sales Analysis
Zale’s same-store sales analysis shows the company had no organic growth in the last five-year period. The
company’s same-store sales were -16.6% and -6.6% in 2009 and 2010, respectively. Negative same-store sales
shows the company’s strategy is not working well and its merchandise is not fresh.
Year
2006
2007
2008
2009
2010
Stores at Beginning
2,345
2,276
2,194
2,135
1,931
Stores Opened
112
63
47
14
6
Stores Closed
77
145
106
218
47
2,276
2,194
2,135
1,931
1,890
0%
0.5%
0%
(16.6%)
(6.6%)
Total Stores
Total Same-store Sales Growth
(Source: Capital IQ)
32
Fixed Assets Analysis
The book value of net property and equipment fell from $283.7 million in 2006 to $173.4 million in 2010, which
was a reduction
duction of $129 million of the ccompany’s fixed assets. The chart below shows the net property and
equipment on balance sheet from 2006 to 2011, in millions of dollars.
Chart: Net PPE on balance sheet from 2006 to 2011
Peer Comparison
Zale Corporation is Sandwiched between High-end
High end and Discount R
Retailers
Given the number of companies and the commodity-like
commodity like nature of the product being sold, the retail jewelry
business is extremely competitive and fragmented. Zale faces increased competition from the growth of mass
merchant retailers, such as Wal-Mart,
Mart, the largest jewelry retailer in the combined U.S. and Canadian market.
Discount retailers, such as Wal-Mart
Mart, have aggressively pursued and captured a large portion of the price
pricesensitive consumer jewelry market. At the upper end, Zale
Zale must compete with stores such as Tiffany, a
company that has more successfully associated its brand with high
high-end
end jewelry items. Moreover, Zale must
33
also deal with increasing competition from internet vendors, such as Blue Nile and BIDZ. Internet retailers are
often able to sell the same product for much lower prices due to very low brick-and-mortar cost.
(For Detailed Business Description of Comparable Companies, Refer Exhibit IX)
Stock Price Comparison
The following chart shows the comparison in stock price movement for Zale, Signet, Blue Nile, and Tiffany in
the last three years. The stock price of competitors took a similar decline in 2008, which highlights the
industry-specific rather than the company-specific nature of the challenges. The drop in Zale’s stock price was
more than its competitors. The stock price development since 2009, however, shows that Signet, Blue Nile, and
Tiffany have recovered considerably from their lows, but Zale has not recovered.
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
-5.00
Zale Corporation (NYSE:ZLC) - Share Pricing
Signet Jewelers Limited (NYSE:SIG) - Share Pricing
Tiffany & Co. (NYSE:TIF) - Share Pricing
Blue Nile Inc. (NasdaqGS:NILE) - Share Pricing
Chart: Stock Performance of Zale Vs Competitors
34
Market Positioning Map Analysis
The market-positioning map clearly shows that the Zale has a better perception in the mind of consumers
because it is offering a medium to high-quality product at lower prices. That is why its market standings are
better than other companies. In the figure below, prices are measured on X-axis and quality on Y-axis, where
Zale is offering a medium to high-quality diamond jewelry at lower prices.
Mass merchants, such as JC Penney and Wal-Mart, fall in the third quadrant, i.e., low prices and low to
medium quality jewelry. Signet is a high-end jeweler that primarily sells fine jewelry at higher prices. Blue
Nile is an online retailer of fine jewelry.
BCG Matrix Analysis

The BCG Matrix is used to rank the business units (or products) on the basis of their relative market
shares and growth rates. Zale lies in the Question Mark’s quadrant. If nothing is done, a question mark
will simply absorb great amount of cash and later as the growth stops becomes a dog.

The BCG Matrix analysis shows that Zale should concentrate on few brands and divest others to
survive in the current market conditions.
35
Chart: BCG Matrix showing ZLC’s Position
Financial Ratios Comparison
Profitability Comparison
Zale had the lowest profitability margin compared to its competitors. In 2010, the most profitable company in
this industry was Tiffany, with an EBITDA margin of 24.65%. Zale’s EBITDA margin was 0.05%, which was
lowest for a brick-and-mortar jewelry company. In 2010, Zale had an operating margin of -2.65% due to the
negative operating income that was due primarily due to the high SG&A expenses compared with the
industry average. Zale’s SG&A expenses as a percent of sales were 50.9% compared to the industry average of
27.2%. The operating margin for Blue Nile, Tiffany, and Signet were 6.40%, 19.85%, and 7.59%, respectively.
Among the selected guideline companies, Zale had the lowest return on equity and return on assets. Due to
the Zale’s negative net income in 2010, both ROE and ROA were negative, whereas most of the competitors
had positive ROE and ROA.
36
Zale Corp.
Comparable Company Analysis
Company Name Ticker Stock Price($) Debt/Equity Interest Cov. EBITDA Margin Operating Margin Profit Margin Asset Turnover Assets/Equity
Zale Corp.
ZLC
4.67
1.58
-0.58
0.05%
Blue Nile
NILE
59.11
0.02
NA
6.88%
Tiffany & Co.
TIF
58.13
0.32
11.28
24.65%
Signet Jewelers
SIG
42.48
0.02
3.59
10.20%
BIDZ.com
BIDZ
1.21
0.00
NA
-0.86%
-2.65%
ROE
ROA
-6.71%
1.38
4.94
-45.61% -9.24%
6.40%
4.24%
2.19
3.09
28.72%
9.29%
19.85%
11.94%
0.83
1.72
16.92%
9.86%
7.59%
5.83%
1.11
1.59
10.34%
6.49%
-1.53%
-1.34%
2.20
1.62
-4.76% -2.94%
Table: Comparable Company Analysis
Comparison of brick-and-mortar
mortar jewelry stores, i.e. Zales Jewelers, Signet Jewelers and Tiffany and Co., shows
sho
that in 2010 Zale’s revenue per store was only $0.88 million compared with $13.20 million for Tiffany and $1.85
million for Signet.
Chart: Comparison of Zale’s
Zale s revenue per store with Tiffany and Signet Jewelers
Comparison of revenue per employee was also lowest for Zale compared to the industry average. Lower
revenue per employee was due primarily to the high number of employees compared to other companies in
the industry. The higher number of employees was one of the reasons for higher SG&A expenses due to the
higher expenses in wages and salary.
37
Zale Corp.
Comparable Company Analysis
Company Name
Zale Corp.
Blue Nile
Tiffany & Co.
Signet Jewelers
BIDZ.com
Ticker SG&A as % of sales Revenue per Employee
ZLC
NILE
TIF
SIG
BIDZ
Industry Avg.
50.9%
15.2%
39.2%
28.5%
25.8%
$
$
$
$
$
126,000
1,727,000
335,000
212,000
592,000
27.2%
$
716,000
Table: Comparable Company’s SG&A and Revenue per Employee Analysis
Same-Store Sales Comparison
In 2009, industry as a whole was going through a bad time due to which the same-store sales declined for most
of the companies. But decline in Zale’s same-store sales was highest. In 2009, Zale’s same-store sales declined
by 16.6%, whereas same-store sales of Tiffany and Co. and Signet Jewelers declined by only 7.0% and 0.4%,
respectively. In 2010, same-store sales of Tiffany and Co. and Signet Jewelers grew by 10.0% and 6.7%,
respectively, compared with a -6.6% for Zale’s same-store sales.
Zale Corp.
Same Store Sales Comparison
Year
Zales Corp.
Tiffany and Co.
Signet Jewelers
2006
2007
2008
2009
2010
0.0%
0.5%
0.0%
-16.6%
-6.6%
0.0%
0.0%
8.0%
-7.0%
10.0%
4.8%
-0.7%
-8.1%
-0.4%
6.7%
(Source: Capital IQ)
Table: Same-store Sales Comparison
38
Leverage Comparison
In 2010, Zale was highly leveraged due to the high level of debt. Zale’s debt-to-equity ratio was 1.58X
compared to 0.32X for Tiffany. Other competitors, i.e., Signet, Blue Nile and Bidz.com, had either no debt or
very low debt. Due to the negative EBIT, Zale’s interest coverage ratio was negative. The negative debt
coverage ratio shows the company was in distress in 2010.
Store Level Observation and Comparison
Visits were made to Zale and its competitors’ stores in the Dallas area, and several points of differentiation
were noticed, which will be pointed out in the Competitive Analysis. Visits were made on Saturday to keep
the level of analysis uniform for all stores.
Locations visited:

Northpark Center, 8687 North Central Expressway, Dallas, Texas 75225

Collin Creek Mall, 811 North Central Expressway, Plano, Texas 75075

Galleria Dallas, 13350 Dallas Parkway, Dallas Texas 75240
Zales
Kay Jewelers
Tiffany and Co.
Macy's
Helzberg Diamonds
Crown Jewelers
J C Penny
Benson's Jewelers
Gordon's Jewelers
Blue Nile
BIDZ
Galleria Dallas
X
X
X
NorthPark Center Collin Creek Mall
X
X
X
X
X
X
X
X
X
X
X
X
Online
Online
Table: Locations visited and observed
39
Key Observations
Zales Jewelers – Zales Jewelers is still looking for ways to define its brand. The emphasis on “Back to
Basics” seems to be not working well. Its stores were either empty or were observed with a small number of
customers. Zales Jewelers offers good value. A big question mark is its lack of experienced store personnel
and effect on upper-end diamond sales. Zales Jewelers faces very tough competition from the entire
distribution channel. The store environment was observed to be dull. The catalog was colorful and full of
details. The lack of trained jewelry professional in the store seems to be an important factor that would have
negatively impacted bridal and high-end sales.
Helzberg Diamonds - The emphasis in the store was on designer jewelry and its special “Expressions
Silver Charm Program” program to drive traffic. Another positive observation was the store personnel was
experienced and trained. The bridal jewelry collection was very good. The company also added ‘Judith Ripka
Bridal and Memoir” to its list of bridal designers and has expanded its loose diamond inventory. Helzberg
Diamonds has built fashion collections by adding the “I am Loved and Mirabella” collections and “Love,
Help and Hope Collection.”
Kay Jewelers - Kay Jewelers had a very good collection of bridal jewelry collection. The biggest additions
were the “Neil Lane Designer Bridal Collection” and the “Tolkowsky Ideal Cut Diamond” to add excitement
in the bridal collections. The emphasis was on the new and improved collection and its bridal program. The
catalog was detailed and colorful. Compared to Zales Jewelers, the store environment was better.
Crown Jewelers - Crown Jewelers lacked a good store environment. Its emphasis was on low prices and its
bridal program. The Crown Jewelers’ catalogue was detailed but not colorful. The store personnel lacked
experience, but were helpful. Crown Jeweler’s bridal collection was better than Zales Jewelers, but was worse
than Helzberg Diamonds.
40
Gordon Jewelers - Gordon Jewelers emphasized its designer and fashion jewelry. The catalogue
was detailed and colorful. The store environment was better than Zales Jewelers. It has a higherend brand. The number of customers was low in the store.
Competitive Benchmark
No. of Customers at Store
Catalog
Store Personnel
Bridal Collection
Store Environment
Emphasis
Programs
Zales
Low
Detailed and Colorful
Lack Training and Experience
Bad collection
Dull
Low price
Back to Basics Program
Helzberg Diamonds
Kay Jewelers
Moderate
Moderate
Detailed and Colorful
Detailed and Colorful
Experienced and Trained
Experienced and Trained
Very good collection
Moderate
Good
Moderate
Designer jewelery
New and improved collection
Expressions Silver Charm Program
Bridal Program
Crown Jewelers
Moderate
Detailed
Were helpful
Moderate
Dull
Price
Bridal Program
Gordon Jewelers
Low
Detailed and Colorful
Were helpful
Moderate
Moderate
Designer Jewelery
Fashion Focus
Table: Store Level Observations
Range of Restructuring Alternatives
Liquidation
One alternative for the company is to wind down the business through an orderly liquidation because some
businesses are worth more dead than alive. Therefore, it is important to look at a liquidation scenario.
The table below summarizes the potential proceeds from the liquidation of the business.
41
Zale Corporation (ZLC)
Hypothetical Liquidation Analysis
January 31, 2011 Balance Sheet ($ In Millions)
Estimated Recovery Rate
Low Base Case High
Current Assets:
Cash and cash equivalents
Inventory
Other current assets
Discontinued assets for sale
Fixed Assets:
Plant, property and equipments
Other Assets:
Goodwill
Long term investments
Deffered tax assets
Deffered charges
Other long term assets
Estimated Liquidation Proceeds
Low
Base Case
High
$
$
$
$
31.40 100%
776.90 30%
38.40 10%
153.00 10%
100%
40%
20%
20%
100%
50%
30%
30%
$
$
$
$
31.40 $
233.07 $
3.84 $
15.30 $
31.40 $
310.76 $
7.68 $
30.60 $
31.40
388.45
11.52
45.90
$
154.60
10%
20%
30%
$
15.46 $
30.92 $
46.38
$
$
$
$
$
100.60
27.70
60.40
13.00
1.90
0%
10%
0%
0%
10%
0%
15%
0%
0%
15%
0%
20%
0%
0%
20%
$
$
$
$
$
2.77
0.19
$
$
$
$
$
4.16
0.29
$
$
$
$
$
5.54
0.38
$
301.84
$
415.52
$
529.19
Less:
Wind Down Expenses (5%)
$
(15.09) $
(20.78) $
(26.46)
Net Assets Available for Distribution
$
286.75 $
394.74 $
502.73
Total Assets (Million $)
Table: Liquidation Analysis
A summary of our assumptions is as follows:
Inventory: We believe that finished goods and raw materials could be liquidated anywhere between 30% and
50% of book value, which is expected to be recorded at the lower of cost or market under U.S. GAAP.
Prepaid Expenses: We assumed the company would not be able to get its prepaid expenses back.
Property, Plant and Equipment: We assumed that all leasehold improvements would have no recovery value
because the improvements are likely connected to the leased property and would, therefore, be returned to the
landlord upon liquidation/lease termination. As it pertains to machinery & equipment, we assumed a low
recovery value, somewhere between 10% and 30%.
42
Other Current Assets: We do not know the components of this balance. We assumed the recovery rate would
be moderate, somewhere between 10% and 30%.
Other Assets: Given the nature of other assets accounts, we assumed the recovery rate for long-term
long
assets
and long-term
term investments would be extremely low, somewhere between 10% and 20%. We assumed the
recovery rate for goodwill
oodwill and deferred assets would be 0%.
Chart: Liquidation Value and Fulcrum Security
Is It An Alternative for Zale?
Even the best
est case scenario of the liquidation analysis shows the total liquidation value is lower than the sum
of equity and debt. The fulcrum security lies in the unsecured debt (account payable) region. Due to such a low
value, other alternatives should be considered.
Going Concern/Status Quo
Going concern implies if the company maintains
m
current capital structure and maintains
maintain business under
current operating conditions. In status quo, the company should continue
co
e to make debt service payments and
maintain
aintain sufficient liquidity to allow for execution of the ccurrent
urrent business plan and wait until economic
43
conditions improve. The primary advantage of this alternative is minimal business disruption which will allow
management to focus on executing a turnaround plan.
Is It An Alternative for Zale?
The success will largely depend on future cash flows of the business and ability to make debt service
payments. It seems difficult for the Zale to be able make such debt service payments as a going concern
because its interest coverage is negative and a cash burn analysis indicates company will not be left with
enough cash next year. Going concern is not an alternative also because it does not de-lever the business. The
company will still have a burdensome capital structure when the economic recovery begins and the company’s
performance will not likely materially improve before the current senior debt matures in July 2013 and July
2014. If it does not work, and the company drains its remaining liquidity in the process, Zale will be left with
few restructuring alternatives and the business would suffer serious harm during the ultimate liquidity crisis.
Valuation as a Going Concern
Valuation was performed using the enterprise value multiple approach. First, the guideline comparable
companies were selected: Blue Nile, Tiffany, Signet Jewelers and Bidz.com. The average EV/EBITDA of the
guideline companies was calculated as 8.65X. In 2010, Zale’s EBITDA was $0.8 million, so the five-year average
EBITDA ($42.02 million) was used to calculate the going concern value of the company. The total enterprise
value was calculated as $406.74 million, which means that the fulcrum security lies in the unsecured debt
(account payable) region. Because of such a low value, other alternatives should also be considered.
(For detailed Multiple Valuation Approach, please refer Exhibit XIV)
44
$900.00
Equity
$110.00 Million
$800.00
$700.00
$600.00
$500.00
Fulcrum Security
$400.00
Unsecured
Debt (Account
Payable)
$244.00 Million
$300.00
$200.00
$406.74 Million
Secured Debt
$385.50 Million
Enterprise Value
Debt + Equity
$100.00
$-
Chart showing Fulcrum Security in Going Concern Valuation
Restructure Balance Sheet/ Debt-to-Equity Swap
An alternate way to restructure the company is to develop an optimal capital structure to meet cash flow of the
business and to avoid future liquidity problems, which can be achieved by offering cash, debt, and equity to
capital structure participants in exchange for their securities.
Benefits: The primary advantage of this method is that it will reduce debt level after completion of a debtequity exchange, which will reduce interest burden on the company and free up additional liquidity. This
method also allows management to move beyond issues that arise from problems with capital structure and
focus on core business.
Issues: Depending on the differing agenda among the capital structure participants, the restructuring plan
would have to be implemented through a Chapter 11 filing. Also, existing equity will likely lose control
without providing new capital to help effectuate a restructuring. The appetite of investors to make a new
money investment will be driven by a variety of factors, including terms of restructuring, long-term view of
the company, and availability of capital.
45
Strategic Buyout or Merger
An option for Zale to consider is selling itself to a strategic buyer. A large player, or a similar-sized company
that would create scale in a combined company, could help Zale improve its competitive situation. Issues that
could potentially be addressed in a scale include: gaining scale in operation and distribution, expanded
locations, enhanced marketing strategy, experienced management team, improved access to the consumer
markets, and a lower cost of capital.
Benefits: The primary advantages include certainty and finality of the process. By doing a strategic buyout,
the company would be able to perform on an expedited basis, thus eliminating the risks associated with a
lengthy restructuring process.
Issues: Strategic buyers are facing their own issues and may not be able to participate. Also, if buyers perceive
a forced sale, it may be difficult to maximize enterprise value.
We evaluated three types of strategic buyers:

Small Strategic Jewelry Retail Company: Signet Jewelers
It will help to expand the brand and increase sales.

Large Strategic Jewelry Retail Company: Tiffany and Co.
The company will become the giant of the jewelry retail industry.

Large Strategic Diversified Retail Company: J.C. Penney and Co.
The company will have scale expansion and will be more diversified.
We assumed the strategic buyout deal will be paid by cash only or in exchange of the acquirer’s stock. By
comparing several different scenarios, we chose the least EPS change payment methods for each buyer, which
46
were stated in the following table. The acquisition by J.C. Penney will cause minimum EPS dilution and will be
the preferred strategic buyout.
(For detailed Strategic Buyout analysis, Refer Exhibit XVI)
Purchase Price/ Share
Premium to Market Share
Strategic
Alternative
$4.70
0%
$5.00
6.38%
$5.30 $5.60 $5.90 $6.20
12.77% 19.15% 25.53% 31.91%
Acquirer
Payment
JC Penny
Cash
Accretion/(Dilution)/Share
(0.04)
% Accrection/(Dilution)/Share -6.34%
Sell to Strategic : Tiffany and Co.
Large Player
Stock
Accretion/(Dilution)/Share
(1.02) (1.03) (1.03) (1.04) (1.05) (1.06)
% Accrection/(Dilution)/Share -35.43% -35.74% -36.04% -36.34% -36.64% -36.94%
Sell to Strategic : Signet Jewelers
Small Player
Stock
Accretion/(Dilution)/Share
(1.39) (1.40) (1.40) (1.41) (1.41) (1.42)
% Accrection/(Dilution)/Share -59.97% -60.22% -60.47% -60.72% -60.96% -61.20%
Sell to Strategic :
Large Player
(0.04) (0.04) (0.05) (0.05) (0.05)
-6.74% -7.15% -7.55% -7.96% -8.36%
Table: Three scenarios of Strategic buyout and expected dilution in each scenario
Transaction Multiple Valuation of Zale Corporation
Valuation was performed using the transaction multiple approach. First, the previous transactions were
selected using Capital IQ. The average EV/Revenue multiple of the previous transactions was calculated as
0.57X. Other multiples were not selected due to lack of sufficient data. In 2010, Zale’s revenue was $1649
million. The total enterprise value was calculated as $939.92 million.
(For detailed Transaction Multiple Approach, please refer Exhibit XVII)
47
$1,000.00
$900.00
Equity
$110.00 Million
$800.00
$700.00
$600.00
$500.00
$939.92 Million
$400.00
Unsecured Debt
(Account
Payable)
$244.00 Million
$300.00
Secured Debt
$385.50 Million
$200.00
$100.00
$Enterprise Value
Debt + Equity
Chart showing value of Zale using Transaction Multiple Valuation
Debt Refinancing and Amendment
Long-term debt amendment will maintain current capital structure and operate business under current
conditions. It can be achieved by extending the debt expiration and making changes in the debt terms so that
the company can perform to the terms and maintain sufficient liquidity to ride out the business cycle. It causes
minimal business disruption and management can stay focused on running the business. Also, it allows
existing equity to maintain control and position in the capital structure. The primary disadvantage of the longterm debt amendment is it does not de-lever the balance sheet and the business will still be overleveraged
when the economy recovers.
48
Recommendation
Zale requires a detailed and structured approach to its turnaround; therefore, the recommended plan of action
is a combination of following strategies:
A) Close Down Unprofitable Stores
Zale should consider closing down its underperforming stores. Specifically, at least 20% of its current
stores are operating at significant losses without reasonable hope of improvement. A Four Wall
EDITDA Analysis (Store Profitability Analysis) should be performed before making a decision to close
down unprofitable stores. For example: Stores with declining sales and a soon-expiring lease term
should be closed first.
B) Cost Reduction Plan
In 2010, Zale’s SG&A expense as percent of sales was about 52% compared to the industry average of
28%, so Zale should right-size its SG&A expenses by changing its corporate structure according to
industry norms.
Staff Reduction: Staffing within stores could be scaled back to more accurately match anticipated store
traffic. Number of employees should be cut back to the industry average.
Store Placement: Perform a more thorough due diligence before opening new stores to avoid future
relocation, closing expenses, and cannibalism of revenue.
Stock-based Compensation: Partial stock based compensation should be considered in place of cash
payroll to reduce SG&A expense.
C) Marketing-Led Strategy and Special Programs
Driving customer demand is critical in all retail industries. One possible strategy for Zale would be to
increase direct marketing efforts dramatically to create brand awareness while investing in store
49
updates and new product lines. Zale should consider introducing an aggressive bridal program similar
to that used by Helzberg. This strategy would clearly be extremely aggressive and would accelerate the
cash burn-out rate in the very near term, but would likely offer the greatest upside if successful.
D) Employee Training
Zale should stress more on employee training because it is one of the most important factors in driving
sales up. Sales people should be able to determine if a customer wants to be helped. In the jewelry retail
industry, the store manager plays a most important role in sales; therefore, the store manager should be
trained and experienced to understand each customer’s need.
E) Focus on Few Brands, Divest Others and Increase Designer Jewelry
BCG Analysis shows the company should concentrate only on profitable brands and divest
unprofitable brands. This will also help the company to increase its brand value. Restructuring options
Zale could pursue range from selling off its Canadian stores or its Piercing Pagoda chain to merging
with its rival, Signet Jewelers Ltd., owner of Kay Jewelers and Jared The Galleria of Jewelry. It could
also sell its Gordon Jewelers division. Due to the demographic changes and increase in the proportion
of the wealthy population, Zale should consider introducing high-end designer jewelry similar to what
Helzberg Diamonds sells at a few locations. Designer jewelry will help the company to drive sales up.
F) Hiring Management/Key people with extensive experience in Jewelry Industry
As mentioned earlier, present management does not have sufficient jewelry industry experience, so
Zale should consider adding few key personnel with extensive experience in the jewelry industry. This
step will add value to the company.
50
G) Debt Refinancing
Amend debt terms so the company can perform to the terms and maintain sufficient liquidity to ride
out the business cycle. The current senior debt matures in July 2013 and July 2014. Debt refinancing will
cause minimal business disruption and management can stay focused on implementing turnaround
plans.
H) Debt Reduction by Debt-Equity Swap
Develop optimal capital structure to meet cash flow of the business and avoid future liquidity
problems. Offer cash, debt, and equity to capital structure participants in exchange for their securities.
De-lever the balance sheet through a partial exchange of debt for equity. A reduced debt level after
completion of the exchange would reduce interest burden on the company and free up additional
liquidity.
Valuation for the Recommended Plan of Action Scenario
Valuation for the proposed plan of action was performed using the DCF approach. Assumption was made that
there will be no growth in revenue for new two years due to restructuring. In 2010, the company’s total
revenue was $1649 million. After the closing of about 20% of the unprofitable stores, its total revenue would
decrease, but revenue per store would increase. Current revenue per store is $0.88 million. We assumed that
after closing its 20% non-profitable stores, revenue per store would increase to about $1.00 million, so we
assumed that its remaining 1,500 stores would earn approximately $1500 million in revenue in 2012. We
projected this revenue with a 5% interim growth rate and a 3% terminal growth rate.
We also assumed that after implementing recommended cost-reduction plan, Zale’s SG&A expenses as a
percent of sales would decrease, but would remain higher than the industry average. We assumed SG&A
expenses as a percent of sales to be 35% for the next five years and then 30% in the terminal year.
51
A WACC of 17% was used to discount the future cash flows.
(Please refer Exhibit XV for detailed WACC Calculation)
We concluded the total enterprise value of the company to be $1,300 million using discounted cash flow
method.
(Please Refer Exhibit XIX for detailed DCF Calculation)
$1,600.00
$1,400.00
$1,200.00
$1,000.00
$800.00
$600.00
$1300 Million
$400.00
Equity
$110.00 Million
Unsecured Debt
(Account Payable)
$244.00 Million
Secured Debt
$385.50 Million
$200.00
$Enterprise Value
Debt + Equity
Chart: Valuation for the recommended plan of action
Sensitivity Analysis
We also performed a sensitivity analysis on DCF by using Monte Carlo Simulation with a thousand
iterations. The following assumptions were made in the Monte Carlo Simulation:
52

Uncertainty in sales was introduced by converting it to a normal distribution with a standard deviation
of 5%

Uncertainty in COGS was introduced by converting it to a triangular distribution with a minimum
40%, a maximum 50%, and most likely 45% COGS as percent of sales.

Uncertainty in SG&A was introduced by converting it to a normal distribution with a mean of 35%and
standard deviation of 5% SGA as percent of sales.
We ran 1,000 iterations and determined the mean enterprise value was $1,485 million.
(Refer Exhibit XX for detailed Monte Carlo Analysis)
53
Exhibit I: Historic Income Statement
Zale Corporation
Income Statement
For the Fiscal Period Ending
12 months
12 months
12 months
12 months
12 months
Jul-31-2006
Jul-31-2007
Jul-31-2008
Jul-31-2009
Jul-31-2010
USD
USD
USD
USD
Revenue
Total Revenue
2,154.0
2,154.0
2,152.8
2,152.8
2,138.0
2,138.0
1,779.7
1,779.7
1,616.3
1,616.3
Cost Of Goods Sold
Gross Profit
1,051.8
1,102.2
1,036.5
1,116.3
1,089.6
1,048.5
948.6
831.2
802.2
814.1
Selling General & Admin Exp.
Depreciation & Amort.
Other Operating Expense/(Income)
Other Operating Exp., Total
946.3
54.7
1.7
1,002.6
963.7
56.6
7.2
1,027.4
991.8
60.2
(12.6)
1,039.4
934.2
58.9
0.9
994.1
846.2
50.0
896.2
99.6
88.8
9.1
(163.0)
(82.1)
(11.2)
(11.2)
(19.0)
(19.0)
(12.4)
(12.4)
(10.4)
(10.4)
(15.7)
(15.7)
Other Non-Operating Inc. (Exp.)
EBT Excl. Unusual Items
88.4
69.9
(3.3)
(173.4)
6.6
(91.2)
Impairment of Goodwill
Gain (Loss) On Sale Of Assets
Asset Writedown
Legal Settlements
Other Unusual Items
EBT Incl. Unusual Items
(9.8)
1.3
79.9
(2.5)
(1.5)
65.9
3.5
(1.9)
(1.7)
(5.0)
(23.8)
(17.2)
(219.4)
(29.9)
(3.4)
(124.5)
Income Tax Expense
Earnings from Cont. Ops.
20.2
59.7
17.8
48.1
4.8
(6.5)
(53.0)
(166.3)
(28.8)
(95.8)
Earnings of Discontinued Ops.
Net Income
(6.1)
53.6
11.1
59.3
7.1
0.6
(23.2)
(189.5)
2.1
(93.7)
Currency (Million)
Operating Income
Interest Expense
Interest and Invest. Income
Net Interest Exp.
USD
(Source: Capital IQ)
54
Exhibit II: Historic Balance Sheet
Zale Corporation
Balance Sheet
Jul-31-2006
Jul-31-2007
Jul-31-2008
Jul-31-2009
Jul-31-2010
USD
USD
USD
USD
USD
42.6
42.6
37.6
37.6
61.3
61.3
25.0
25.0
26.2
26.2
-
-
-
12.5
12.5
8.6
8.6
Inventory
Prepaid Exp.
Other Current Assets
Total Current Assets
903.3
16.5
86.9
1,049.2
1,021.2
24.0
89.5
1,172.3
799.2
22.5
83.9
966.9
740.3
20.8
18.7
817.2
703.1
20.1
13.3
771.3
Gross Property, Plant & Equipment
Accumulated Depreciation
Net Property, Plant & Equipment
678.3
(394.6)
283.7
743.6
(439.2)
304.4
734.8
(436.9)
297.9
690.7
(452.6)
238.1
693.8
(520.4)
173.4
Long-term Investments
Goodwill
Deferred Tax Assets, LT
Deferred Charges, LT
Other Long-Term Assets
Total Assets
21.9
96.3
11.3
1,462.6
25.0
100.7
1.3
10.2
1,613.9
27.5
103.7
10.9
8.4
1,415.3
24.8
94.6
51.5
1.4
3.2
1,231.0
26.3
98.4
64.7
22.8
3.5
1,160.4
Accounts Payable
Accrued Exp.
Curr. Port. of LT Debt
Curr. Income Taxes Payable
Unearned Revenue, Current
Def. Tax Liability, Curr.
Other Current Liabilities
Total Current Liabilities
224.2
59.2
26.5
28.1
61.9
400.0
182.0
60.8
29.7
28.4
73.5
374.5
154.1
70.0
21.6
41.8
65.7
353.2
124.4
64.8
17.1
60.2
46.4
43.5
356.3
157.2
56.8
11.3
15.0
78.1
59.1
10.8
388.3
Long-Term Debt
Unearned Revenue, Non-Current
Def. Tax Liability, Non-Curr.
Other Non-Current Liabilities
Total Liabilities
202.8
12.5
3.8
39.1
658.2
227.3
69.5
40.1
711.4
326.3
131.2
38.1
848.8
310.5
150.0
40.3
857.2
284.7
140.7
38.6
852.4
0.5
111.4
808.9
(150.0)
33.6
804.4
0.5
138.0
868.1
(150.0)
45.9
902.6
0.5
144.5
847.2
(476.7)
51.0
566.5
0.5
147.3
657.7
(469.0)
37.3
373.8
0.5
160.6
564.0
(465.6)
48.4
308.0
804.4
902.6
566.5
373.8
308.0
1,462.6
1,613.9
1,415.3
1,231.0
1,160.4
Currency (Millions)
ASSETS
Cash And Equivalents
Total Cash & ST Investments
Other Receivables
Total Receivables
LIABILITIES
Common Stock
Additional Paid In Capital
Retained Earnings
Treasury Stock
Comprehensive Inc. and Other
Total Common Equity
Total Equity
Total Liabilities And Equity
55
(Source: Capital IQ)
Exhibit III: Historic Cash Flow Statement
Zale Corporation
Cash Flow Statement
For the Fiscal Period Ending
12 months
12 months
12 months
12 months
12 months
Jul-31-2006
Jul-31-2007
Jul-31-2008
Jul-31-2009
Jul-31-2010
USD
USD
USD
USD
USD
Net Income
53.6
59.3
0.6
(189.5)
(93.7)
Depreciation & Amort.
Depreciation & Amort., Total
55.8
55.8
57.6
57.6
60.2
60.2
58.9
58.9
50.0
50.0
Other Amortization
(Gain) Loss From Sale Of Assets
Asset Writedown & Restructuring Costs
Stock-Based Compensation
Net Cash From Discontinued Ops.
Other Operating Activities
Change In Inventories
Change in Acc. Payable
Change in Other Net Operating Assets
Cash from Ops.
4.3
9.8
6.4
29.1
(16.1)
(64.9)
35.3
(31.4)
82.1
2.7
2.5
6.1
1.4
(5.4)
(97.0)
(34.6)
48.2
40.6
0.7
3.5
1.9
4.4
(21.6)
(34.3)
71.1
(34.5)
60.8
113.0
0.7
2.7
28.8
5.7
(37.9)
53.2
1.6
78.5
2.7
3.4
1.0
29.9
3.9
(15.4)
(8.7)
42.4
24.2
(0.1)
36.9
Capital Expenditure
Invest. in Marketable & Equity Securt.
Other Investing Activities
Cash from Investing
(76.4)
1.2
(6.3)
(81.6)
(79.3)
(3.2)
(7.2)
(89.6)
(85.1)
(2.2)
225.1
137.7
(28.4)
3.1
(25.3)
(14.7)
(0.6)
(15.2)
Long-Term Debt Issued
Total Debt Issued
2,264.8
2,264.8
3,977.6
3,977.6
3,630.8
3,630.8
5,107.2
5,107.2
4,615.1
4,615.1
Long-Term Debt Repaid
Total Debt Repaid
(2,191.8)
(2,191.8)
(3,953.1)
(3,953.1)
(3,531.8)
(3,531.8)
(5,123.0)
(5,123.0)
(4,610.6)
(4,610.6)
10.7
(100.0)
1.1
(15.2)
17.8
1.4
43.7
2.0
(326.7)
0.1
(225.7)
6.2
0.2
(9.4)
(25.5)
(21.0)
1.8
(12.9)
0.3
(5.0)
0.2
25.2
(4.3)
(36.4)
0.5
1.2
Currency (Million)
Issuance of Common Stock
Repurchase of Common Stock
Other Financing Activities
Cash from Financing
Foreign Exchange Rate Adj.
Net Change in Cash
(Source: Capital IQ)
56
Exhibit IV: Common Sized Balance Sheet
Zale Corporation
Common Sized Balance Sheet
Balance Sheet as of:
Jul-31-2006
Jul-31-2007
Jul-31-2008
Jul-31-2009
Jul-31-2010
Percent
Percent
Percent
Percent
Percent
2.9%
2.9%
2.3%
2.3%
4.3%
4.3%
2.0%
2.0%
2.3%
2.3%
-
-
-
1.0%
1.0%
0.7%
0.7%
61.8%
1.1%
5.9%
71.7%
63.3%
1.5%
5.5%
72.6%
56.5%
1.6%
5.9%
68.3%
60.1%
1.7%
1.5%
66.4%
60.6%
1.7%
1.1%
66.5%
Gross Property, Plant & Equipment
Accumulated Depreciation
Net Property, Plant & Equipment
46.4%
(27.0%)
19.4%
46.1%
(27.2%)
18.9%
51.9%
(30.9%)
21.0%
56.1%
(36.8%)
19.3%
59.8%
(44.8%)
14.9%
Long-term Investments
Goodwill
Deferred Tax Assets, LT
Deferred Charges, LT
Other Long-Term Assets
Total Assets
1.5%
6.6%
0.8%
100.0%
1.5%
6.2%
0.1%
0.6%
100.0%
1.9%
7.3%
0.8%
0.6%
100.0%
2.0%
7.7%
4.2%
0.1%
0.3%
100.0%
2.3%
8.5%
5.6%
2.0%
0.3%
100.0%
Accounts Payable
Accrued Exp.
Curr. Port. of LT Debt
Curr. Income Taxes Payable
Unearned Revenue, Current
Def. Tax Liability, Curr.
Other Current Liabilities
Total Current Liabilities
15.3%
4.0%
1.8%
1.9%
4.2%
27.4%
11.3%
3.8%
1.8%
1.8%
4.6%
23.2%
10.9%
4.9%
1.5%
3.0%
4.6%
25.0%
10.1%
5.3%
1.4%
4.9%
3.8%
3.5%
28.9%
13.5%
4.9%
1.0%
1.3%
6.7%
5.1%
0.9%
33.5%
Long-Term Debt
Unearned Revenue, Non-Current
Def. Tax Liability, Non-Curr.
Other Non-Current Liabilities
Total Liabilities
13.9%
0.9%
0.3%
2.7%
45.0%
14.1%
4.3%
2.5%
44.1%
23.1%
9.3%
2.7%
60.0%
25.2%
12.2%
3.3%
69.6%
24.5%
12.1%
3.3%
73.5%
0.0%
7.6%
55.3%
(10.3%)
2.3%
55.0%
0.0%
8.6%
53.8%
(9.3%)
2.8%
55.9%
0.0%
10.2%
59.9%
(33.7%)
3.6%
40.0%
0.0%
12.0%
53.4%
(38.1%)
3.0%
30.4%
0.0%
13.8%
48.6%
(40.1%)
4.2%
26.5%
55.0%
55.9%
40.0%
30.4%
26.5%
100.0%
100.0%
100.0%
100.0%
100.0%
ASSETS
Cash And Equivalents
Total Cash & ST Investments
Other Receivables
Total Receivables
Inventory
Prepaid Exp.
Other Current Assets
Total Current Assets
LIABILITIES
Common Stock
Additional Paid In Capital
Retained Earnings
Treasury Stock
Comprehensive Inc. and Other
Total Common Equity
Total Equity
Total Liabilities And Equity
57
(Source: Capital IQ)
Exhibit V: Common Sized Income Statement
Zale Corporation
Income Statement
For the Fiscal Period Ending
12 months
12 months
12 months
12 months
12 months
Jul-31-2006
Jul-31-2007
Jul-31-2008
Jul-31-2009
Jul-31-2010
Percent
Percent
Percent
Percent
Percent
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
Cost Of Goods Sold
Gross Profit
48.8%
51.2%
48.1%
51.9%
51.0%
49.0%
53.3%
46.7%
49.6%
50.4%
Selling General & Admin Exp.
Depreciation & Amort.
Other Operating Expense/(Income)
43.9%
2.5%
0.1%
44.8%
2.6%
0.3%
46.4%
2.8%
(0.6%)
52.5%
3.3%
0.1%
52.4%
3.1%
-
46.5%
47.7%
48.6%
55.9%
55.4%
4.6%
4.1%
0.4%
(9.2%)
(5.1%)
(0.5%)
(0.5%)
(0.9%)
(0.9%)
(0.6%)
(0.6%)
(0.6%)
(0.6%)
(1.0%)
(1.0%)
4.1%
3.2%
(0.2%)
(9.7%)
0.4%
(5.6%)
(0.5%)
0.1%
3.7%
(0.1%)
(0.1%)
3.1%
0.2%
(0.1%)
(0.1%)
(0.3%)
(1.3%)
(1.0%)
(12.3%)
(1.9%)
(0.2%)
(7.7%)
0.9%
2.8%
0.8%
2.2%
0.2%
(0.3%)
(3.0%)
(9.3%)
(1.8%)
(5.9%)
(0.3%)
2.5%
0.5%
2.8%
0.3%
0.0%
(1.3%)
(10.6%)
0.1%
(5.8%)
Revenue
Total Revenue
Other Operating Exp., Total
Operating Income
Interest Expense
Net Interest Exp.
Other Non-Operating Inc. (Exp.)
EBT Excl. Unusual Items
Impairment of Goodwill
Gain (Loss) On Sale Of Assets
Asset Writedown
Legal Settlements
Other Unusual Items
EBT Incl. Unusual Items
Income Tax Expense
Earnings from Cont. Ops.
Earnings of Discontinued Ops.
Net Income
(Source: Capital IQ)
58
Exhibit VI: Balance Sheet Growth Analysis
Zale Corp.
Growth Analysis Balance Sheet
Fiscal Years Ended,
Compound Growth
July 31,
2007
2008
2009
2010
3-Year
5-Year
ASSETS
Current assets:
Cash
-11.7%
63.0%
-59.2%
4.8%
-34.6%
-11.4%
Inventories
13.1%
-21.7%
-7.4%
-5.0%
-6.2%
-6.1%
Prepaid expenses
45.5%
-6.3%
-7.6%
-3.4%
-5.5%
5.1%
3.0%
-6.3%
-77.7%
-28.9%
-60.2%
-37.5%
11.7%
-17.5%
-15.5%
-5.6%
-10.7%
-7.4%
Other current assets
Total current assets
Fixed assets:
Gross Fixed Assets
Fixed assets
less accumulated depreciation
Fixed assets, net
Other assets:
Goodwill
9.6%
-1.2%
-6.0%
0.4%
-2.8%
0.6%
9.6%
-1.2%
-6.0%
0.4%
-2.8%
0.6%
-11.3%
0.5%
-3.6%
-15.0%
NMF
NMF
7.3%
-2.1%
-20.1%
-27.2%
-23.7%
-11.6%
0.5%
4.6%
3.0%
-8.8%
4.0%
-2.6%
14.2%
10.0%
-9.8%
6.0%
-2.2%
4.7%
NA
NA
NA
NA
NMF
NMF
-9.7%
-17.6%
-45.2%
471.7%
76.9%
23.5%
5.9%
9.7%
16.6%
22.9%
19.7%
13.6%
10.4%
-12.3%
-13.0%
-5.7%
-9.5%
-5.6%
-18.8%
-15.3%
-19.3%
26.4%
1.0%
-8.5%
NA
NA
NA
NA
NMF
NMF
Income taxes payable
12.1%
-27.3%
-20.8%
-12.3%
-16.7%
-13.3%
Deferred tax liabilities, current
Long-term Investments
Loans Receivable Long-Term
Other Long-Term Assets
Total other assets
TOTAL ASSETS
LIABILITIES & EQUITY
Current liabilities:
Accounts payable
Current portion L-T debt
18.7%
-10.6%
-29.4%
27.4%
-5.2%
-1.2%
Accrued expenses
2.7%
15.1%
-7.4%
-12.3%
-9.9%
-1.0%
Unearned Revenue
1.1%
47.2%
44.0%
29.7%
36.7%
29.1%
NA
NA
NA
-75.2%
-6.4%
-5.7%
0.9%
9.0%
4.9%
-0.7%
Other current liabilites
Total current liabilities
Long-term liabilities:
Long-term debt
Unearned revenue, LT
Deferred tax liabilities
Other long-term liabilities
Total long-term liabilities
Total liabilities
12.1%
43.6%
-4.8%
-8.3%
-6.6%
8.9%
456.0%
88.8%
14.3%
-6.2%
3.6%
83.2%
NA
NA
NA
NA
NMF
NMF
2.6%
-5.0%
5.8%
-4.2%
0.7%
-0.3%
30.5%
47.1%
1.0%
-7.3%
-3.2%
15.8%
8.1%
19.3%
1.0%
-0.6%
0.2%
6.7%
0.0%
Equity:
Common stock
0.0%
0.0%
0.0%
0.0%
0.0%
Additional paid-in capital
23.9%
4.7%
1.9%
9.0%
5.4%
9.6%
Retained earnings (deficit)
7.3%
-2.4%
-22.4%
-14.2%
-18.4%
-8.6%
NMF
Treasury stock
0.0%
-217.8%
1.6%
0.7%
NMF
36.6%
11.1%
-26.9%
29.8%
-2.6%
9.6%
Total equity
12.2%
-37.2%
-34.0%
-17.6%
-26.3%
-21.3%
TOTAL LIABILITIES & EQUITY
10.3%
-12.3%
-13.0%
-5.8%
-9.5%
-5.6%
Other equity items
59
Exhibit VII: Income Statement Growth Analysis
Zale Corp.
Growth Analysis Income Statement
Fiscal Years Ended,
Compound Growth
July 31,
2007
2008
2009
2010
3-Year
5-Year
Revenues:
Revenue
Total revenues
-0.1%
-0.1%
-0.7%
-0.7%
-16.8%
-16.8%
-9.2%
-9.2%
-13.1%
-13.1%
-6.9%
-6.9%
Cost of goods sold
-1.5%
5.1%
-12.9%
-15.4%
-14.2%
-6.5%
Gross profit
1.3%
-6.1%
-20.7%
-2.0%
-11.9%
-7.3%
Operating expenses:
Selling, general & admin.
1.8%
2.9%
-5.8%
-9.4%
-7.6%
-2.8%
Depr. & amort. expense
3.5%
6.4%
-2.2%
-15.1%
-8.9%
-2.2%
323.5%
-275.0%
107.1%
NA
NMF
NMF
2.5%
1.2%
-4.4%
-9.8%
-7.1%
-2.8%
-10.8%
-89.9%
-1910.0%
49.6%
NMF
NMF
Other Operating expenses
Total operating expenses
Operating income
Other income (expense):
Interest (expense)
-69.6%
34.7%
16.1%
-51.0%
NMF
NMF
52.9%
140.0%
-2975.0%
27.6%
NMF
NMF
Total other income (expense)
-16.8%
53.0%
-422.2%
13.1%
NMF
NMF
Pretax income
-17.5%
-102.7%
-12083.3%
40.2%
NMF
NMF
-11.9%
-73.0%
-1204.2%
45.7%
NMF
NMF
-19.5%
-113.8%
-2419.7%
38.5%
NMF
NMF
282.0%
-36.0%
-426.8%
109.1%
-45.6%
NMF
10.5%
-99.2%
-38000.0%
47.1%
NMF
NMF
3.5%
6.4%
-2.2%
-15.1%
-8.9%
-2.2%
-5.7%
-52.4%
-250.3%
69.1%
NMF
NMF
-10.8%
-89.9%
-1910.0%
49.6%
NMF
NMF
6.9%
-47.5%
-315.2%
61.6%
NMF
NMF
12.1%
43.6%
-4.8%
-4.7%
-4.8%
9.9%
3.8%
7.3%
-66.6%
-48.2%
-58.4%
-33.8%
Unusual income (expense)
Income tax expense
Income before extraordinary gain
Discontinued operations
Net income
Depreciation & amortization
EBITDA
EBIT
Gross cash flow
Total debt
Capital expenditures
60
Exhibit VIII: Key Executives
Theophlius Killion - Chief Executive Officer, President and Director
Theophlius Killion has been the Chief Executive Officer of Zale Corporation since September 23, 2010, and has
been the President since August 2008. He served as an Interim Chief Executive Officer of Zale Corporation
from January 13, 2010 to September 23, 2010. Mr. Killion has 30 years of experience. Mr. Killion served as
Executive Vice President of Human Resources, Legal and Corporate Strategy for Zale Corporation from
January 2008 to August 2008. Previously, Mr. Killion worked at executive recruiting firm Berglass Associates,
and focused on companies in the retail, consumer goods and fashion industries. Prior to Berglass Associates,
Mr. Killion served as an Executive Vice President of Human Resources Division of Hilfiger Tommy Corp. since
January 2005 and for its subsidiary, Tommy Hilfiger USA Inc., since March 2004. His responsibilities entailed
worldwide HR strategies and initiatives that included recruitment and retention, training and development,
compensation and benefits and performance management. He served as the Vice President of Human
Resources of The Limited Brands from January 1996 to March 2004 and also served as its Corporate Vice
President of HR for Merchandising and Design. He held senior human resource roles at Macy’s East and The
Home Shopping Network. He has been a Director of Zale Corporation since September 23, 2010. Mr. Killion
holds graduate degree in Marketing from the School of Management at Boston University.
Matthew W. Appel - Chief Financial Officer and Executive Vice President
Matthew Appel has been the Chief Financial Officer of Zale Corporation since June 15, 2009, and the Executive
Vice President since May 27, 2009. Mr. Appel served as the Principal Accounting Officer of Exlservice
Holdings, Inc. and its Chief Financial Officer from March 31, 2007 to May 15, 2009 and Vice President from
February 28, 2007 to May 15, 2009. He has 30 years of professional experience in finance and Business Process
Outsourcing (“BPO”) and worked with Electronic Data Systems Corporation from 2006 to 2007 as Vice
President, BPO Product Management where he was responsible for strategy and business plan development
61
and investment prioritization for EDS’ BPO product portfolio. From 2003 to 2005, he served as Vice President
of Finance and Administration BPO at EDS. From 2001 to 2003, he served as Senior Vice President of Finance
and Accounting BPO at Affiliated Computer Services, Inc. where he was responsible for the general
management of the finance and accounting BPO business. Previously, he worked for Tenneco Inc., served as
its Vice President of Financial Analysis and Planning as well as the President of Tenneco Business Services, its
shared services captive. He also served as Controller, Treasurer and Director of Internal Audit for Tenneco’s
wholly owned subsidiary Newport News Shipbuilding. He started his career at Arthur Andersen, where he
worked in its audit practice. Mr. Appel is a Certified Public Accountant and Certified Management
Accountant, and he holds an MBA in Accounting and a BA in Business Administration from Rutgers
University.
Gilbert P. Hollander - Chief Merchandising Officer, Chief Sourcing Officer and Executive Vice
President
Gilbert Hollander has been Executive Vice President and Chief Sourcing Officer of Zale Corporation since
September 2007, and also been its Chief Merchandising Officer since January 2010. Mr. Hollander has been
Senior Vice President of Merchandise Purchasing of Piercing Pagoda, Inc. since February 2000. He served as
President of Piercing Pagoda of Zale Corporation since January 2005 to August 2006 and its Group Senior Vice
President since January 2005. Mr. Hollander joined Piercing Pagoda Inc., in May 1997 as Director of New
Business Development. Mr. Hollander served as Vice President of Divisional Merchandise for Piercing
Pagoda, to which he was appointed in August 2003. Mr. Hollander served as Senior Vice President of
Merchandising for Piercing Pagoda from February 2000 to August 2003. He increased product innovation and
improved merchandise assortments targeted to Piercing Pagoda’s fashion-forward customer. He had a vast
experience of 19 years in the jewelry kiosk business. Prior to joining Piercing Pagoda Inc., Mr. Hollander held
various senior management positions with Silver & Gold Connection, a kiosk-based jewelry retailer, and has
owned and operated his own wholesale and retail jewelry business.
62
John Legg - Senior Vice President of Supply Chain
John Legg has been Senior Vice President of Supply Chain of Zale since September 14, 2010. Mr. Legg served
as Managing Director for Management Services International, LLC, a global consulting services company he
formed to assess, design and launch supply chain solutions in support of restructuring, process improvement
and inventory management initiatives. Prior to that, he served as Senior Vice President of Global Distribution
and Logistics for Warnaco, Inc. and Vice President of International Distribution and Logistics for Liz
Claiborne, Inc. Mr. Legg is a graduate of Northeastern University.
Richard A. Lennox - Chief Marketing Officer & E-Commerce Officer and Executive Vice President
Richard Lennox has been Executive Vice President and Chief Marketing Officer & E-Commerce Officer of Zale
Corporation since August 17, 2009. Mr. Lennox joined Zale from J. Walter Thompson-New York, where he
served as Executive Vice President and Director of the De Beers Group “A diamond is forever” marketing
campaign since 1998. He served as Director of US at JWT since August 2009. He was the principal architect of
programs that helped grow US diamond jewelry sales significantly for over ten years. Mr. Lennox started at
JWT in 1989 and has held various senior level marketing positions. He began his career in 1987 with AGBLondon. He has received many accolades, including eight Effie awards for marketing effectiveness, and was
recognized as one of Ad Age’s 50 most influential U.S. marketers in 2001. Mr. Lennox is a graduate of the
University of Reading.
(Source: Zale’s website and Capital IQ)
63
Exhibit IX: Business Description of Comparable Companies
Signet Jewelers Limited (NYSE:SIG)
Signet Jewelers Limited operates as a specialty jewelry retailer in the United States, the United Kingdom, the
Republic of Ireland, and the Channel Islands. It engages in the retail of jewelry and watches, as well as offers
associated services. The company operates retail stores under various brands, including Kay Jewelers, Jared
The Galleria of Jewelry, H. Samuel, and Ernest Jones. As of March 25, 2010, it operated 1,400 stores in the
United States. As of January 30, 2010, the company operated 552 stores in the United Kingdom, including 14 in
the Republic of Ireland; and three in the Channel Islands. Signet Jewelers Limited was founded in 1950 and is
based in Hamilton, Bermuda.
Tiffany & Co. (NYSE:TIF)
Through its subsidiaries, Tiffany & Co. engages in the design, manufacture, and retail of fine jewelry. Its
jewelry products include gemstone jewelry, gemstone band rings, diamond rings, wedding bands for brides
and grooms, non-gemstone, gold or platinum jewelry, and sterling silver jewelry. The company also offers
Tiffany & Co.-brand merchandise, including timepieces and clocks; sterling silver merchandise, including
flatware, hollowware, trophies, key holders, picture frames, and desk accessories; crystal, glassware, china,
and other tableware; custom engraved stationery; writing instruments; eyewear; leather goods; and fashion
accessories. In addition, it provides fragrance products sold under the trademarks, including Tiffany, Pure
Tiffany, and Tiffany for Men. The company serves its customers through retail sales, internet and catalog sales,
business-to-business sales, and wholesale distribution primarily in the Americas, the Asia-Pacific, and Europe.
It also sells its products through Tiffany & Co. stores as well as through department store boutiques in Japan.
As of January 31, 2010, Tiffany & Co. operated approximately 220 retail stores worldwide. The company was
founded in 1837 and is based in New York, New York.
Blue Nile Inc. (Nasdaq:NILE)
64
Blue Nile, Inc. and its subsidiaries operate as an online retailer of diamonds and fine jewelry worldwide. Its
fine jewelry selection includes diamond, gemstone, platinum, gold, pearl, and sterling silver jewelry and
accessories as well as settings, wedding bands, earrings, necklaces, pendants, and bracelets. The company also
offers a range of other fine jewelry products and watches to complement its selection of customized diamond
jewelry. It offers its products under the brand name Blue Nile through its websites, bluenile.com, bluenile.co.uk
and bluenile.ca. The company was formerly known as Internet Diamonds, Inc., and the name was changed to
Blue Nile, Inc. in November 1999. Blue Nile, Inc. was founded in March 1999 and is headquartered in Seattle,
Washington.
Bidz.com Inc. (Nasdaq:BIDZ)
Bidz.com, Inc. operates as an online retailer of jewelry in the United States and internationally. It operates a
website, bidz.com, for the purpose of selling merchandise, utilizing an online sales auction platform; and a
fixed price online store at www.buyz.com. The company’s product inventory includes gold, platinum, and
silver jewelry sets with diamonds, rubies, emeralds, sapphires, and other precious and semi-precious stones;
and a selection of jewelry, including rings, necklaces, earrings, bracelets, jewelry sets, watches and accessories,
and brand-name merchandises. It also acts as an agent in the sale of certified merchant merchandise owned by
third parties. The company was founded in 1998 and is headquartered in Culver City, California.
Helzberg Diamonds
Helzberg Diamond Shops, Inc., doing business as Helzberg Diamonds, engages in the jewelry business. The
company provides jewelry, such as rings, necklaces, earrings, and bracelets. It also offers diamond and gold
jewelry, jewelry for men and baby, colored gems, wedding bands, watches, and various gifts. The company
was founded in 1915 and is headquartered in North Kansas City, Missouri. It has stores in the United States.
(Source: Capital IQ)
65
Exhibit X: Ratio Analysis
Zale Corp.
Ratio Analysis
Fiscal Years Ended
July 31,
2006
2007
2008
Fiscal Year-End Averages
2009
2010
3-Year Avg.
5-Year Avg.
LIQUIDITY
Current ratio
Quick ratio
Working capital turnover
2.6
0.1
3.3
3.1
0.1
2.7
2.7
0.2
3.5
2.3
0.1
3.9
2.0
0.1
4.2
2.3
0.1
3.9
2.6
0.1
3.5
0.4
8.9
0.4
4.7
0.6
0.7
0.7
(15.7)
0.7
(5.2)
0.7
(6.7)
0.6
(1.3)
NA
NA
1.2
4.7
7.6
1.5
NA
NA
1.0
5.7
7.1
1.3
NA
NA
1.4
7.1
7.2
1.5
142.4
3
1.3
7.6
7.5
1.4
187.9
2
1.1
5.1
9.3
1.4
165.2
2
1.3
6.6
8.0
1.4
165.2
2
1.2
6.0
7.7
1.4
51.2%
7.2%
4.6%
2.5%
3.7%
5.5%
5.0%
25.3%
51.9%
6.8%
4.1%
2.7%
3.7%
4.1%
5.4%
27.1%
49.0%
3.2%
0.4%
0.0%
0.0%
-0.1%
2.8%
-266.7%
46.7%
-5.8%
-9.2%
-10.6%
-15.4%
-17.8%
-7.3%
24.2%
50.4%
-2.0%
-5.1%
-6.2%
-8.6%
-11.3%
-3.1%
22.0%
48.7%
-1.5%
-4.6%
-5.6%
-8.0%
-9.7%
-2.5%
-73.5%
49.8%
1.9%
-1.0%
-2.3%
-3.3%
-3.9%
0.6%
-33.6%
0.98
3.5%
2.54%
72%
1.04
3.7%
2.63%
71%
0.01
4.0%
2.82%
71%
(3.22)
1.6%
3.31%
207%
(2.00)
0.9%
3.09%
340%
(1.74)
2.2%
3.07%
206%
(0.64)
2.7%
2.88%
152%
0.7
0.0
1.5
5.5%
1.8
9.9%
0.9
0.0
1.3
4.1%
1.8
7.3%
(0.3)
(0.0)
1.5
-0.1%
2.5
-0.3%
0.9
(0.1)
1.4
-17.8%
3.3
-58.7%
0.8
(0.1)
1.4
-11.3%
3.8
-42.6%
0.5
(0.1)
1.4
-9.7%
3.2
-33.9%
0.6
(0.0)
1.4
-3.9%
2.6
-16.9%
LEVERAGE
Total liabilities/Total assets
Interest coverage
ACTIVITY
Accounts receivable turnover
Accts rec. collection period
Inventory turnover
Accounts payable turnover
Fixed asset turnover
Total asset turnover
PROFIT MARGIN
Gross profit margin
EBITDA/sales
EBIT/sales
Net income/sales
Net income/net total assets
Pretax net income/total assets
Gross cash flow/sales
Effective tax rate
DEPRECIATION
Net income/depreciation
Capital expenditures/sales
Depreciation/sales
Depreciation/capital expend.
DUPONT CALCULATIONS
Net income / pretax income
Pretax income/ sales
Times sales / assets
Equals pretax return on assets
Times assets / equity
Equals pretax return on equity
66
Exhibit XI: Altman Z-Score Analysis
Zale Corporation
Altman Z-Score Calculation
2006
2007
2008
2009
2010
Current Assets
1,049,244.00
1,172,318.00
966,863.00
817,217.00
771,314.00
Current Liabilities
400,025.00
374,458.00
353,198.00
356,332.00
388,308.00
Total Liabilities
658,215.00
711,373.00
848,789.00
857,179.00
852,361.00
Total Assets
1,462,568.00
1,613,946.00
1,415,260.00
1,230,972.00
1,160,381.00
Retained Earnings
808,859.00
868,111.00
847,185.00
657,682.00
564,010.00
Market Value of Equity
1,249,972.88
1,033,773.62
937,025.32
188,842.08
56,429.12
EBIT
99,593.00
88,835.00
9,081.00
(162,971.00)
(82,077.00)
Sales
2,153,955.00
2,152,785.00
2,138,041.00
1,779,744.00
1,616,305.00
0.44
0.49
0.43
0.37
0.33
0.55
0.54
0.60
0.53
0.49
T3 (EBIT/Total Assets)
T4 (MV of Equity/Total
Liabilities)
0.07
0.06
0.01
-0.13
-0.07
1.90
1.45
1.10
0.22
0.07
T5 (Sales/Total Assets)
1.47
1.33
1.51
1.45
1.39
Altman Z-Score = 1.2T1 + 1.4T2 +
3.3T3 + 0.6T4 + .999T5
4.14
3.73
3.55
2.34
2.27
Year
Balance Sheet Items:
Income Statement Items:
T1 (Working Capital/Total
Assets)
T2 (Retained Earning/Total
Assets)
Zones of Discrimination:
Z > 2.99 -”Safe” Zone
1.8 < Z < 2.99 -”Grey” Zone
Z < 1.80 -”Distress” Zone
67
Exhibit XII: Comparable Company Data
Zale Corp.
Comparable Company Data
Public Comps
Subject Company
Ticker
Data date
CURRENT MARKET DATA
Price per share ($)
Shares outstanding (mm)
Zale Corp.
ZLC
MEDIAN
MEAN
1/31/2011
Blue Nile Tiffany & Co. Signet Jewelers
NILE
TIF
SIG
BIDZ.com
BIDZ
1/2/2011
1/31/2011
1/29/2011
12/31/2010
4.67
32.10
50.3
53.6
40.2
62.7
59.11
15.10
58.13
128.40
42.48
86.40
1.21
20.80
FINANCIAL DATA (mm$)
Revenue
EBITDA
EBIT
Net income (E)
Gross cash flow (CF)
Interest expense
Depreciation and amortization
1,658.3
0.8
(44.0)
(111.3)
(66.5)
76.5
44.8
1,709.1
186.8
141.2
107.3
152.9
27.2
45.7
1,740.1
283.3
223.3
145.4
205.4
31.8
60.0
332.9
22.9
21.3
14.1
15.7
0.0
1.6
3,085.3
760.4
612.5
368.4
516.3
54.3
147.9
3,437.4
350.7
261.0
200.4
290.1
72.8
89.7
104.8
(0.9)
(1.6)
(1.4)
(0.7)
0.0
0.7
CAPITALIZATION (mm$)
Total Assets
Book Value of Equity (BV)
Market value of equity (MVE)
+ Total debt (book value)
+ Book value of Preferred stock
- Cash and Cash equivalent
Enterprise Value (EV)
1205.0
244.0
149.9
385.5
0.0
31.4
504.0
1,620.8
994.1
2,281.4
15.9
0.0
207.7
2,089.6
1,756.2
1,048.8
3,013.0
180.0
0.0
276.3
2,916.7
151.8
49.1
892.6
0.8
0.0
113.3
780.1
3,735.7
2,177.5
7,463.9
688.2
0.0
681.6
7,470.5
3,089.8
1,939.0
3,670.3
31.0
0.0
302.1
3,399.2
47.6
29.4
25.2
0.0
0.0
8.1
17.1
MARKET MULTIPLE DATA
EV/Revenue
EV/ EBITDA
EV/ EBIT
P / CF
P/E
P / BV
0.3
630.0
(11.5)
(2.3)
(1.3)
0.6
1.7
9.8
12.6
13.6
19.3
2.7
1.5
8.7
12.8
12.0
21.0
6.1
2.3
34.1
36.6
56.9
63.3
18.2
2.4
9.8
12.2
14.5
20.3
3.4
1.0
9.7
13.0
12.7
18.3
1.9
0.2
(19.0)
(10.7)
(36.0)
(18.0)
0.9
68
Exhibit XIII: Comparable Company Multiples
Zale Corp.
Comparable Company Multiples
Company Name
Ticker
Average TEV/Revenue
Average TEV/EBITDA
Average TEV/EBIT
2008
2009
2010
2008
2009
2010
2008
2009
2010
Zale Corp.
ZLC
0.39
0.24
0.25
8.86
7.50
-
31.17
-
-
Blue Nile
NILE
1.81
2.09
2.15
25.24
33.32
31.40
26.86
37.20
34.20
Tiffany & Co.
TIF
1.67
1.57
2.20
8.05
7.52
10.13
10.07
9.92
13.26
Signet Jewelers
SIG
3.85
0.60
0.80
32.74
8.38
10.13
43.83
15.85
17.33
BIDZ.com
BIDZ
1.01
0.42
0.28
8.84
4.13
23.55
9.07
4.34
10.86
Company Name
Zale Corp.
Blue Nile
Tiffany & Co.
Signet Jewelers
BIDZ.com
Ticker
ZLC
NILE
TIF
SIG
BIDZ
Average P/CF
Average P/E
Average P/BV
2008
2009
2010
2008
2009
2010
2008
2009
2010
5.87
47.07
44.41
28.39
25.39
3.33
73.83
53.79
9.67
8.42
1.14
44.40
17.34
8.41
12.96
73.95
42.12
14.69
7.79
12.84
60.52
20.98
4.11
7.91
59.41
23.64
14.77
29.99
0.94
19.06
2.69
0.98
6.70
0.29
26.00
2.30
0.95
2.18
0.27
20.17
3.15
1.50
1.13
69
Exhibit XIV: Going Concern Valuation
Zale Corp.
Multiples Valuation Summary
Performance Measure
EV/EBITDA
Enterprise Value Range (Million
Dollars)
Multiples
Low
Average
High
Low
Average
High
-18.96
8.65
34.06
-891.33
406.74
1601.00
-891.33
406.74
1601.00
Estimated Enterprise Value (mm$)
Selected Enterprise Value (mm$)
406.74
Note: EBITDA used here is five year average EBITDA i.e. $47.02 millions
70
Exhibit XV: Weighted Average Cost of Capital
Zale Corp.
Weighted Average Cost of Capital
Company Name Ticker BV of Debt(mm$) BV of Preferred (mm$) Total MVE (mm$) Total MVIC (mm$) Debt to Capital Equity to Capital Effective Tax Rate Levered Beta [F6] Unlevered Beta
Zale Corp.
ZLC
385.50
0.00
149.91
504.01
76.49%
29.74%
35.00%
3.21
Blue Nile
NILE
0.80
0.80
892.56
780.06
0.10%
114.42%
35.00%
1.55
1.20
1.55
Tiffany & Co.
TIF
688.20
0.00
7463.89
7470.49
9.21%
99.91%
35.00%
1.73
1.63
Signet Jewelers
SIG
31.00
0.00
3670.27
3399.17
0.91%
107.98%
35.00%
2.06
2.05
BIDZ.com
BIDZ
0.00
0.00
25.17
17.07
0.00%
147.46%
35.00%
1.43
1.43
Average
17.34%
99.90%
35.00%
1.57
Median
0.91%
107.98%
35.00%
1.55
Selected
17.34%
82.66%
35.00%
1.57
Unlevered Equity Beta
1.57
Debt to Equity
0.21
Selected Subject Tax Rate
0.35
Relevered Equity Beta
1.79
Risk Free Rate
4.27%
[F1]
Equity Risk Premium
6.00%
[F2]
NOTES:
[F1] 20-Year U.S Treasury as of the valuation date. Source: Federal Reserve Website.
http://www.federalreserve.gov/releases/H15/current/
Levered Equity Beta
1.79
Cost of Capital
14.99%
[F2]Source: Ibbotson Year Book 2010
Unsystematic Risk Factors
4.55%
Subject's Cost of Equity Capital
19.54%
Credit Rating of Debt
-
[F4]
[F5] Based on Baa rated bond. Source: Federal Reserve Website.
Subjects Estimated Pre-tax Cost of Debt Capital
6.04%
[F5]
http://www.federalreserve.gov/releases/H15/current/
Selected Subject Tax Rate
35.00%
After Tax Cost of Debt Capital
3.93%
[F3] Includes the consideration of small stock premium and company specific risk premium
[F3]
Source: Ibbotson Yearbook 2010
[F4] Morningstar Website
[F6] Source: Capital IQ
Debt to Capital
17.34%
Equity to Capital
82.66%
Conclusion
16.83%
Weighted Average Cost of Capital
17.00%
71
Exhibit XVI: Strategic Buyout Analysis
Zale Corp.
-111.3
32.1
-3.5
-1.3
4.7
Net Income
Market Shares outstanding
Pre-Deal EPS
Pre-Deal P/E
Market Share Price
JC Penny
389.0
238.0
1.6
19.6
32.1
Tiffany and Co.
368.4
128.4
2.9
20.3
58.1
Signet Jewelers
200.4
86.4
2.3
18.3
42.5
Using Stock to buy 100% Zale's shares outstanding
0%
6.38%
12.77%
19.15%
25.53%
31.91%
Premium
$4.70
$5.00
$5.30
$5.60
$5.90
$6.20
0%
6.38%
12.77%
19.15%
25.53%
31.91%
0%
6.38%
12.77%
19.15%
25.53%
31.91%
JC Penny
Stock exchange
0.147
0.156
0.165
0.175
0.184
0.193
New Issues
34.88
37.11
39.33
41.56
43.79
46.01
Total New Shares Expected EPS Expected Share Price EPS Dilutive EPS Difference
272.88
1.02
19.97
-37.74%
(0.62)
275.11
1.01
19.81
-38.24%
(0.63)
277.33
1.00
19.65
-38.74%
(0.63)
279.56
0.99
19.49
-39.22%
(0.64)
281.79
0.99
19.34
-39.70%
(0.65)
284.01
0.98
19.19
-40.18%
(0.66)
Premium
$4.70
$5.00
$5.30
$5.60
$5.90
$6.20
Tiffany and Co. Stock exchange
0.081
0.086
0.091
0.096
0.101
0.107
New Issues
10.38
11.04
11.71
12.37
13.03
13.69
Total New Shares Expected EPS Epected Share Price EPS Dilutive EPS Difference
138.78
1.85
37.53
-35.43%
(1.02)
139.44
1.84
37.35
-35.74%
(1.03)
140.11
1.84
37.18
-36.04%
(1.03)
140.77
1.83
37.00
-36.34%
(1.04)
141.43
1.82
36.83
-36.64%
(1.05)
142.09
1.81
36.66
-36.94%
(1.06)
Premium
$4.70
$5.00
$5.30
$5.60
$5.90
$6.20
Signet Jewelers Stock exchange
0.111
0.118
0.125
0.132
0.139
0.146
New Issues
9.56
10.17
10.78
11.39
12.00
12.61
Total New Shares Expected EPS Epected Share Price EPS Dilutive EPS Difference
95.96
0.93
17.01
-59.97%
(1.39)
96.57
0.92
16.90
-60.22%
(1.40)
97.18
0.92
16.79
-60.47%
(1.40)
97.79
0.91
16.69
-60.72%
(1.41)
98.40
0.91
16.58
-60.96%
(1.41)
99.01
0.90
16.48
-61.20%
(1.42)
Using Cash to buy 100% Zale's shares outstanding
Premium
$4.70
$5.00
$5.30
$5.60
$5.90
$6.20
JC Penny
0.00%
6.86%
13.46%
22.69%
31.93%
45.12%
Paid Cash
$150.87
160.5
170.13
179.76
189.39
199.02
New Net Income
$373.91
$372.95
$371.99
$371.02
$370.06
$369.10
Expect EPS
1.57
1.57
1.56
1.56
1.55
1.55
EPS Dilutive
-3.88%
-4.13%
-4.37%
-4.62%
-4.87%
-5.12%
EPS Difference
(0.06)
(0.07)
(0.07)
(0.08)
(0.08)
(0.08)
Premium
$4.70
$5.00
$5.30
$5.60
$5.90
$6.20
Tiffany and Co.
0.00%
6.86%
13.46%
22.69%
31.93%
45.12%
Paid Cash
$150.87
160.5
170.13
179.76
189.39
199.02
New Net Income
$353.31
$352.35
$351.39
$350.42
$349.46
$348.50
Expect EPS
2.75
2.74
2.74
2.73
2.72
2.71
EPS Dilutive
-4.10%
-4.36%
-4.62%
-4.88%
-5.14%
-5.40%
EPS Difference
(0.12)
(0.13)
(0.13)
(0.14)
(0.15)
(0.16)
Premium
$4.70
$5.00
$5.30
$5.60
$5.90
$6.20
Signet Jewelers
0.00%
6.86%
13.46%
22.69%
31.93%
45.12%
Paid Cash
150.87
160.5
170.13
179.76
189.39
199.02
New Net Income
185.3
184.4
183.4
182.4
181.5
180.5
Expect EPS
2.14
2.13
2.12
2.11
2.10
2.09
EPS Dilutive
-7.53%
-8.01%
-8.49%
-8.97%
-9.45%
-9.93%
EPS Difference
(0.17)
(0.19)
(0.20)
(0.21)
(0.22)
(0.23)
72
Exhibit XVII: Transaction Multiple Valuation Approach
Zale Corp.
Transaction Multiple Valuation
Enterprise Value Multiples
Announcement Date
Target Name
Acquirer Name
Sales
EBITDA
EBIT
2/13/2007
MOC Corp.
Goldman Sachs Group Inc.
11/1/2007
Brinkhaus Jewelers
Birks and Mayors Inc.
1.01
-
-
11/8/2006
11/16/2007
L. Congress Inc.
Roger Ltd. Inc.
Finlay Fine Jewelry Corp.
Gitanjali Gems Ltd.
0.70
0.218
-
-
1/29/2004
Reeds Jewelers
-
0.34
10.43
38.95
2/13/2008
JBR Inc.
Renaissance Jewelry Inc.
0.57
Price Multiples
Revenue
Earning
Book Value
0.63
22.20
7.30
(Source: Capital IQ)
High
1.01
10.43
38.95
0.63
22.20
7.30
Low
0.22
10.43
38.95
0.63
22.20
7.30
Median
0.57
10.43
38.95
0.63
22.20
7.30
Average
0.57
10.43
38.95
0.63
22.20
7.30
Selected Multiple
0.57
10.43
38.95
0.63
22.20
7.30
Enterprise Value (Million $)
939.92
8.344
-1713.8
1404.74
-2116.76
2135.30
Selected Enterprise Value (Million $)
939.92
73
Exhibit XVIII: Valuation Assumption for Recommended Plan of Action
Zale Corp.
DCF Assumptions
Revenue Growth for 5 years
Terminal Growth
5%
3%
COGS as % of Sales (5 years)
COGS as % of Sales (Terminal)
50%
45%
SG&A as % of Sales (5 years)
SG&A as % of Sales (Terminal)
35%
30%
Depreciation and Amortization as % of Sales (5 years)
Depreciation and Amortization as % of Sales (Terminal)
Income tax Rate
3%
3%
35%
Capital Expenditure as % of Sales (5 years)
Capital Expenditure as % of Sales (Terminal)
3%
3%
Working Capital as % of Incremental Revenue
3%
Valuation date
01/31/11
74
Exhibit XIX: Valuation for the Recommended Plan of Action
Zale Corp.
Discounted Cash Flow
Fiscal Year Ending
Actual
Projected
07/31/10
07/31/11
07/31/12
07/31/13 07/31/14
07/31/15 Terminal Period
$1,658 $
1,658 $
1,500 $ 1,575 $ 1,654 $
1,736 $
1,789
Revenue
Revenue Growth
Less:
COGS
Less:
SG&A
0.0%
829.15
COGS as % of Sales
SG&A as % of Sales
Equals: EBITDA
Less: Depreciation & Amortization
D&A as % of Sales
Equals: EBIT
EBIT Margin
Less: Income Tax at 35.0%
Equals: After-Tax Profit
Calculation of Cash Flows
Net Profit After Tax
Plus: Depreciation & Amortization
Less: Capital Expenditures
CapEx as % of Sales
Less: Incremental Working Capital at 3.0%
Equals: Net Cash Flow From Operations
Capitalized Value of Terminal Period Earnings,
Terminal Period Multiplier @
Period Discounting
Times: WACC at 17.5%
Equals: Discounted Net Cash Flow from Operations
Indicated Fair value of Invested Capital
Equals:
$
$
750.00
5.0%
5.0%
5.0%
3.0%
787.50
826.88
868.22
804.84
50.0%
50.0%
50.0%
50.0%
50.0%
45.0%
580.41
525.00
551.25
578.81
607.75
536.56
35.0%
35.0%
35.0%
35.0%
35.0%
30.0%
248.75
49.75
225.00
45.00
236.25
47.25
248.06
49.61
260.47
52.09
447.13
53.66
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
199.00
180.00
189.00
198.45
208.37
393.48
12.0%
12.0%
12.0%
12.0%
12.0%
22.0%
69.65
129.35
63.00
117.00
66.15
122.85
69.46
128.99
72.93
135.44
137.72
255.76
129 $
50
50
3.0%
129
0.25
0.9608
124 $
117 $
45
45
3.0%
(5)
122
123 $
47
47
3.0%
2
121
129 $
50
50
3.0%
2
127
135 $
52
52
3.0%
2
133
256
54
54
3.0%
2
254
0.7479
1.7479
2.7479
0.8864
0.7544
0.6420
108 $
91 $
81 $
3.7479
0.5464
73 $
6.8966
4.7479
0.4650
815
$
1,292
Indicated Value of Invested Capital Marketable, Controlling Interest Basis (Rounded) $
1,300
75
XX: Monte Carlo Simulation (Sensitivity) Result
@RISK Output Report for Net present value of investment / Year 0
Performed By: Sudhanshu Jain
Date: Monday, June 27, 2011 4:12:17 AM
Simulation Summary Information
Workbook Name
monte carlo.xlsx
Number of Simulations
1
Number of Iterations
1000
Number of Inputs
23
Number of Outputs
2
Sampling Type
Latin Hypercube
Simulation Start Time
6/27/11 4:11:55
Simulation Duration
00:00:04
Random # Generator
Mersenne Twister
Random Seed
1995707508
Summary Statistics for Net present value of investment / Year 0
Statistics
Minimum
$732
Percentile
5% $1,066
Maximum
$2,531
10% $1,138
Mean
$1,485
15% $1,197
Std Dev
$266
20% $1,255
Variance
70944.17044
25% $1,295
Skewness
0.119268016
30% $1,346
Kurtosis
3.054965921
35% $1,381
Median
$1,488
40% $1,409
Mode
$1,294
45% $1,452
Left X
$1,066
50% $1,488
Left P
5%
55% $1,520
Right X
$1,926
60% $1,553
Right P
95%
65% $1,584
Diff X
$860
70% $1,618
Diff P
90%
75% $1,662
#Errors
0
80% $1,710
Filter Min
Off
85% $1,749
Filter Max
Off
90% $1,827
#Filtered
0
95% $1,926
Regression and Rank Information for Net present value of investm
Rank
1
Name
SGA / Year 5
Regr
-0.817
Corr
-0.814
2
CGS / Year 5
-0.333
-0.417
3
Sales / Year 5
0.208
0.154
4
SGA / Year 1
-0.180
-0.170
5
SGA / Year 2
-0.161
-0.154
6
SGA / Year 3
-0.145
-0.158
7
SGA / Year 4
-0.130
-0.119
8
Other operating expenses
-0.115 -0.146
/ Year 5
9
CGS / Year 1
-0.073
-0.061
10
CGS / Year 2
-0.065
-0.070
11
CGS / Year 3
-0.060
-0.056
12
CGS / Year 4
-0.053
-0.086
13
Sales / Year 1
0.037
0.046
14
Sales / Year 3
0.034
0.053
76
Disclosures:
The author of this report holds no financial interest in the securities of the subject company. The author of this report
knows of no existence of any conflict of interest that might bias the content of this report. The author does not serve as an
officer, director or advisory board member of the subject company.
Disclaimer:
The information set forth herein has been obtained or derived from sources generally available to the public and believed
by the author to be reliable, but the author does not make any representation or warranty, express or implied, as to its
accuracy or completeness. This report is for educational purposes only written by a student participating in the Carl
Marks Student Paper Competition. The information is not intended to be used as the basis of any investment decisions by
any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer
to buy or sell any security.
77